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Red wave or blue wave? Here are the key election races Wall Street is watching as early indicators

Key Points
  • Indiana and Kentucky, where polls close at 6 p.m. ET, could offer early clues as to whether either party is making strides toward a total sweep of Congress in Tuesday's midterms.
  • Early races in Florida and Virginia will also be important in showing whether the consensus view holds and Democrats take the House while the GOP holds or adds to its Senate majority.
  • Stocks could rally if there's a GOP surge — or red wave — and some strategists see a big decline if Democrats overcome the odds and take both the House and Senate.
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Congressional races in Indiana, Kentucky, Florida and Virginia will be among the first Wall Street is watching to see whether the electorate's response to President Donald Trump's programs is strong enough to launch either a "red wave" of support or a "blue wave" backlash.

The view of major firms such as Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley is for a mixed outcome, with Democrats gaining control of the House and Republicans holding or even adding to their majority in the Senate. The market reaction to that scenario could be muted, but not so if there's an upset, with either party staging a surprise victory and gaining total control of Congress.

Stocks could rally if there's a GOP surge — or red wave — and some strategists see a sharp decline if Democrats overcome the odds and take both the House and Senate.

Key early indicators of blue or red wave:

  • Kentucky — polls start closing at 6 p.m. ET
  • Indiana — polls start closing at 6 p.m. ET
  • Virginia — polls close at 7 p.m. ET
  • Florida — polls start closing at 7 p.m. ET

For that reason, investors are tuned in to the early races, which can't tell the whole story but could give clues to the broader outcome of the midterm elections. One of those races is being fought in the 6th District of Kentucky, where Amy McGrath, a retired Marine lieutenant colonel, is challenging GOP Rep. Andy Barr.

"It's going to be one of the first races [to close]. If she wins, it's very positive for Democrats. If he wins, it's not hugely negative, but it's not good for the Democrats. Kentucky is so Republican. This is in Lexington, where the University of Kentucky is. … There's a liberal area of Lexington, but there's the farm area outside," said Tom Block, Fundstrat Washington policy strategist.

Block said he will also be focused on Virginia, where Rep. Scott Taylor is defending his seat in the 2nd District against Elaine Luria, who, like Taylor, is a Navy veteran. In Virginia's 5th District, Republican Denver Riggleman is running a close race against Democrat Leslie Cockburn for a seat vacated by Rep. Tom Garrett, who is retiring. A third Virginia House seat is up for grabs in the 7th District, where Rep. Dave Brat is running against former CIA operative Abigail Spanberger in a close race for a seat that has been in GOP hands for decades.

"Between Kentucky and the two or three Virginia races, if the Republicans are winning them all, it means they could hold the House," said Block.

'First bellwether Senate seat'

Indiana's Senate race is also one to watch, with a 6 p.m. ET poll close. "The first bellwether Senate seat. There aren't really any competitive House races here — a Democratic upset in Indiana 2 or 9 would mean the Blue Wave is going to be bigly," wrote Cowen policy strategist Chris Krueger. The race may also be a referendum on Trump trade policy.

"Absent a trade war with farmers at the tip of the retaliatory spear, this would — in a "normal" year — probably be a lay-up for Republicans. Incumbent Democrat Joe Donnelly is a charter member of the small collection of Democratic Senators who have their seats almost solely because of having the luck to run against singularly awful Republican candidates. …Donnelly has proven to be a stronger candidate than Republicans expected though his numbers really softened post Kavanaugh. If the Democrats can hold this Senate seat, good Blue Wave indicator. If the GOP wins, their majority is very safe. It will be interesting to see if this race is called quickly — in either direction," Krueger wrote.

Greg Valliere, chief global strategist at Horizon Investments, said he too is watching Indiana, where Donnelly is in a tough race against former local lawmaker Mike Braun, in a state Trump won by 20 percentage points. "If it looks like he's in trouble, that would indicate a long night for the Democrats," said Valliere.

The consensus view is that Democrats will flip 32 to 38 House seats, and if key races aren't leaning toward Democrats, it will show the GOP could keep its majority, according to Strategas Research. The firm identified districts likely to change over, including a number of seats in eastern states Pennsylvania, New York, New Jersey, North Carolina, Florida, Ohio and Virginia.

Block said if the Republican majority holds, it's a strong referendum on Trump's policies. "It's actually a tremendous victory for Donald Trump. It's a personal victory for Donald Trump if the Republicans keep the House," said Block. "I don't think there's another way to look at it. It's a verdict by the country that they don't mind Donald Trump. It's an affirmation of his trade policy. It's an affirmation of what he's saying about immigration."

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Eyes on Florida

Valliere said he's also watching the early races for broader signals, and Florida is one of great interest.

"It's Florida and then Florida and then Florida. You've got two fascinating races — gubernatorial and Senate. You've also got a demographic change. You have so many people who have fled Puerto Rico and gone to Florida. I think the vote could flip in the electoral college in the next election because of the demographics," said Valliere.

Polls close at 7 p.m. ET across most of the Sunshine State, where three-term Democrat Sen. Bill Nelson is running against outgoing GOP Gov. Rick Scott. The last votes come in an hour later from the Panhandle, which leans toward Republicans. Florida's governor's race is also tense, with Democrat Andrew Gillum, the mayor of Tallahassee, in a close race with Republican Ron DeSantis. Florida is seen as a litmus test for national sentiment, having voted for former President Barack Obama and also Trump.

Valliere noted that Democrats look set to win in a core group of states that went for Trump in 2016 — Ohio, Michigan, West Virginia, Wisconsin and Pennsylvania. "Incredibly, Democrats are favored to win Senate seats in all five states," says Valliere. Valliere said the races could have implications for electoral votes in 2020. "There's reason for them [Republicans] to be concerned about 2020," said Valliere.

Plenty of other races will also be watched for what they say about 2020 and for the public's view of Trump and his policies. In Texas, Sen. Ted Cruz is running against Democratic upstart Beto O'Rourke, viewed as a candidate with more national appeal by Democrats. While Cruz is expected to win, O'Rourke has made inroads into parts of Texas that are typically viewed as more conservative.

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Source: Strategas