Barron's Cover
SATURDAY, MARCH 31, 2012
Power Shift
By JIM MCTAGUE
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Obama may well win in re-election this fall, but the GOP will take control of Congress. That's good news for investors. Why energy and defense will benefit, spending will be cut, and most individual tax rates will stay right where they are.
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If President Obama hangs onto his job in November, the thrill of his victory will be short-lived: Barron's predicts that Republicans will wrest control of the Senate from the Democrats, who've led the chamber since 2006, and that the GOP will strengthen its hold on the House. An analysis of this fall's 33 Senate races sees Republicans poised to pick up at least three seats, for a 50-49 Senate, with one independent, overturning Democrats' current 53-47 advantage. We also see the GOP adding a seat in the House, pushing its majority up to 243-192.
Our close analysis of state-by-state races paints a rosier picture for the Republicans than do the expert forecasters from the main parties, because we give extra points to candidates who raise the greatest percentage of their campaign funds in-state; this implies they have strong grass-roots support.
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For investors, our prediction is good news. GOP control of Congress will likely mean that most individual tax rates will stay where they are, and that Congress and the president may be able to agree on some serious spending cuts and major corporate-tax reforms. Steep reductions in defense spending probably will be curtailed, making this an auspicious time to invest in the sector. Regulations and policies inhibiting the production of domestic oil and gas will be relaxed. And the 2010 health-care bill passed by the Democratic controlled Congress will be repealed.
With Barack Obama's threatened increase in taxes—especially the significant hikes in the capital-gains rates for high earners—no longer in play, the pace of investment and job-creation should pick up, accelerating the rebound in stock and real-estate prices that the administration and the Federal Reserve have been desperately trying to engineer since 2008.
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WE ANTICIPATE THAT President Obama will face a very tough challenge from Republican Mitt Romney because a record 40% of voters identify themselves as independents, compared with 31% who identify themselves as Democrats and 27% who identify themselves as Republicans, according to Gallup.
Independents are more interested in performance than in party, which is why we've seen more "wave elections" in recent years, in which incumbent members of one or the other party are tossed out the door en masse.
Right now, about 64% of all voters believe the country is headed in the wrong direction, four percentage points lower than a year ago. While that downward trend is good news for President Obama, it is still relatively high—and reason to expect that the campaign will be no stroll in the park for him. Voters are almost as angry today about the president's signature health-care law and his expensive, ineffectual stimulus as they were in 2010, when, in a stunning reprimand, they dumped Democrats out of 63 House seats and six Senate seats.
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Additionally, voters are weary of the war in Afghanistan, and they dislike an energy policy that declares war on oil.
GOP pollster Scott Rasmussen of Asbury Park, N.J., holds that individual Senate races in recent years have been determined entirely by the outcome of presidential voting in the particular state. Voters rarely split their tickets anymore. In the event Mitt Romney unseats Obama, Rasmussen says, then the GOP would easily win control of the chamber. But if Obama blows Romney away, the Democrats would retain control. And if the presidential contest is close, Romney will likely take enough states to pick up seats, he says.
John Morgan, president of Applied Research Coordinates in Fairfax, Va., a Republican demographics shop, insists: "Romney will not be blown away. I can guarantee you that. He'll run better than John McCain did."
That said, a break-away bid for the presidency by Ron Paul would assure an Obama victory. Paul's magnetic appeal for independents—that prized demographic—who are fed up with both parties should not be underestimated.
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President Obama's power of incumbency is a huge advantage for the Democrats. But the GOP has had its share of lucky breaks that should help level the playing field. Tens of millions of dollars in new advertising money are sloshing around this election cycle to promote GOP candidates and their causes. This is in part thanks to the fact that the Supreme Court in January 2010 struck down laws limiting political spending by individuals, corporations and unions.
"It may well be that the Supreme Court's decision will end up having more to do with Republicans possibly gaining control of the Senate than almost any other factor in the campaign," says Democratic Party demographer Morley Winograd. Another advantage: Republican-controlled state legislatures have redrawn the lines of congressional districts in 17 states. "We have some good geography," a veteran GOP campaign expert told us. The Democrats, on the other hand, are burdened by a math problem this cycle. The party must defend 23 seats while Republicans need defend only 10. "With the Democrats defending 2-to-1, the odds really do favor the GOP," says demographer Morgan, a University of Chicago graduate who's worked in the field since 1991. "There will be a surprise in here somewhere."
If President Obama hangs onto his job in November, the thrill of his victory will be short-lived: Barron's predicts that Republicans will wrest control of the Senate from the Democrats, who've led the chamber since 2006, and that the GOP will strengthen its hold on the House. An analysis of this fall's 33 Senate races sees Republicans poised to pick up at least three seats, for a 50-49 Senate, with one independent, overturning Democrats' current 53-47 advantage. We also see the GOP adding a seat in the House, pushing its majority up to 243-192.
Our close analysis of state-by-state races paints a rosier picture for the Republicans than do the expert forecasters from the main parties, because we give extra points to candidates who raise the greatest percentage of their campaign funds in-state; this implies they have strong grass-roots support.
.
For investors, our prediction is good news. GOP control of Congress will likely mean that most individual tax rates will stay where they are, and that Congress and the president may be able to agree on some serious spending cuts and major corporate-tax reforms. Steep reductions in defense spending probably will be curtailed, making this an auspicious time to invest in the sector. Regulations and policies inhibiting the production of domestic oil and gas will be relaxed. And the 2010 health-care bill passed by the Democratic controlled Congress will be repealed.
With Barack Obama's threatened increase in taxes—especially the significant hikes in the capital-gains rates for high earners—no longer in play, the pace of investment and job-creation should pick up, accelerating the rebound in stock and real-estate prices that the administration and the Federal Reserve have been desperately trying to engineer since 2008.
.
WE ANTICIPATE THAT President Obama will face a very tough challenge from Republican Mitt Romney because a record 40% of voters identify themselves as independents, compared with 31% who identify themselves as Democrats and 27% who identify themselves as Republicans, according to Gallup.
Independents are more interested in performance than in party, which is why we've seen more "wave elections" in recent years, in which incumbent members of one or the other party are tossed out the door en masse.
Right now, about 64% of all voters believe the country is headed in the wrong direction, four percentage points lower than a year ago. While that downward trend is good news for President Obama, it is still relatively high—and reason to expect that the campaign will be no stroll in the park for him. Voters are almost as angry today about the president's signature health-care law and his expensive, ineffectual stimulus as they were in 2010, when, in a stunning reprimand, they dumped Democrats out of 63 House seats and six Senate seats.
.
Additionally, voters are weary of the war in Afghanistan, and they dislike an energy policy that declares war on oil.
GOP pollster Scott Rasmussen of Asbury Park, N.J., holds that individual Senate races in recent years have been determined entirely by the outcome of presidential voting in the particular state. Voters rarely split their tickets anymore. In the event Mitt Romney unseats Obama, Rasmussen says, then the GOP would easily win control of the chamber. But if Obama blows Romney away, the Democrats would retain control. And if the presidential contest is close, Romney will likely take enough states to pick up seats, he says.
Pat Wellenbach/AP
Gov. Angus King (I-Maine)
John Morgan, president of Applied Research Coordinates in Fairfax, Va., a Republican demographics shop, insists: "Romney will not be blown away. I can guarantee you that. He'll run better than John McCain did."
That said, a break-away bid for the presidency by Ron Paul would assure an Obama victory. Paul's magnetic appeal for independents—that prized demographic—who are fed up with both parties should not be underestimated.
.
President Obama's power of incumbency is a huge advantage for the Democrats. But the GOP has had its share of lucky breaks that should help level the playing field. Tens of millions of dollars in new advertising money are sloshing around this election cycle to promote GOP candidates and their causes. This is in part thanks to the fact that the Supreme Court in January 2010 struck down laws limiting political spending by individuals, corporations and unions.
John Tlumacki/Getty
Prof. Elizabeth Warren (D-Mass.)
"It may well be that the Supreme Court's decision will end up having more to do with Republicans possibly gaining control of the Senate than almost any other factor in the campaign," says Democratic Party demographer Morley Winograd. Another advantage: Republican-controlled state legislatures have redrawn the lines of congressional districts in 17 states. "We have some good geography," a veteran GOP campaign expert told us. The Democrats, on the other hand, are burdened by a math problem this cycle. The party must defend 23 seats while Republicans need defend only 10. "With the Democrats defending 2-to-1, the odds really do favor the GOP," says demographer Morgan, a University of Chicago graduate who's worked in the field since 1991. "There will be a surprise in here somewhere."
SEVEN OF 23 Democratic Senate seats are "open" owing to retiring incumbents, versus three "open" GOP Senate seats. One of the Republican seats is in Texas, which the Democrats are unlikely to win this year, the second is Maine, where the front runner, former Gov. Angus King, an independent, who has clashed as bitterly with Democrats as he has with Republicans. There's no predicting how he'll vote in Washington. The remaining GOP open seat is in Arizona, which is considered a toss-up, since Republican rhetoric on immigration has angered the large Hispanic voting bloc in that state.
Democrats would argue that the Barron's prediction is overly pessimistic about their party's prospects, because a passionate army, composed of the young, numerous Hispanic voters, African-Americans, and women who launched Obama into the White House, still strongly supports our president.
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Mark M. Murray/Landov
Sen. Scott Brown (R-Mass.)
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Winograd and his colleague Michael Hais, who co-wrote Millennial Makeover: MySpace, YouTube and the Future of American Politics, believe that voters under 30, or "millennials," pose the most serious challenge to Republicans this cycle. "There will be 16 million more millennials eligible to vote in 2012 than there were in 2008, and the group has the potential to provide as many as one out of four voters," they told Barron's in an e-mail. These young voters support Obama over any challenger by a 2-to-1 margin, they argue. "These voters likely will give Democrats a couple of Senate seats they might not otherwise win, and perhaps a handful of House seats."
As for the GOP's electoral-math argument, veteran Democratic election strategist Mark Putnam, founder of Putnam Partners, says it's not that big a deal. If both Maine and Vermont are won by independent candidates who caucus with the Democrats, then the party can get up to 50 seats by way of wins in Massachusetts and North Dakota, he says. (Putnam is working for North Dakota Democratic Senate candidate Heidi Heitkemp.) Then, Putnam argues, Democrats only need to win either Montana or Virginia, currently Democratic seats, or Nevada, to hang onto their Senate majority.
Barron's analysis predicts a worst-case scenario for Republicans—assuming a narrow Romney loss—of a three-seat Senate pickup, which still tips the scale in the party's favor. This assumes the defeat of Massachusetts Republican Sen. Scott Brown by Democratic challenger and former Obama advisor and Harvard law professor Elizabeth Warren, as well as wins by GOP candidates in Missouri, Montana, Nebraska, North Dakota, and Virginia—all now Democratic seats.
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Jeff Malet/Newscom
Rep. Connie Mack IV (R-Fla.)
The best-case scenario for the GOP is a six-seat pickup, assuming an upset in Florida of incumbent Democrat Bill Nelson. In this scenario, Brown retains his seat in Massachusetts. The GOP would also have to win Democratic seats in Wisconsin, Missouri, Montana, Nebraska, North Dakota and Virginia for this outcome. And, more important, Romney would win the presidency. This would give the GOP a 53-46 advantage, not including one independent (Maine's King.)
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Senate Democrats currently have a 53-47 advantage, including the two independents who caucus with them.
It's not looking too great for them at this point. Florida's Nelson, a former Space Shuttle astronaut, is in the political fight of his life—and this is before the GOP even picks its candidate, which it will do in July. Former Republican Rep. Connie Mack IV and former Republican Sen. George LeMieux (he was appointed to complete an expiring term in 2009) are running against Nelson, with Mack ahead of the Democrat in a recent poll.
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Both GOP challengers have raised more money in-state than has Nelson, although he has more than $10 million—almost 10 times either Mack or LeMieux's war chests at this juncture. Nelson has raised 68% of his cash in-state, versus 89% for LeMieux and 71% for Mack.
UNIVERSITY OF VIRGINIA politics guru Larry Sabato says the Senate race in Virginia between former Democratic Gov. Tim Kaine and former Republican Gov. George Allen for a seat being vacated by Jim Webb is the most competitive in the country. Obama leads Romney right now in polls of Virginia voters, and presidential preferences may determine the outcome.
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Rebecca Breyer/AP
Rep. Mazie Hirono (D-Hawaii)
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In Missouri, Democratic incumbent Claire McCaskill is behind in the polls, although she won't know until the August primary who her GOP opponent will be. McCaskill has been a strong supporter of President Obama, and her re-election is becoming a referendum on his policies, which Missourians don't like. She's raised $4.8 million. But only 44% of this comes from in-state. Republican Rep. Todd Akin, who appears to be the leading Senate primary candidate in Missouri, raised 93% of his $1.2 million in campaign funds in state.
In Hawaii, Obama's birthplace, there is an open Democratic Senate seat, too. Former GOP Gov. Linda Lingle is polling well against two possible Democratic challengers, Rep. Mazie Hirono and former Rep. Ed Case. However, Lingle has raised just 62% ($607,258) in-state, compared with 72% ($335,600) for Hirono. This will be a real test of the Barron's thesis on the importance of the percentage of funds from in-state—since Lingle has raised $830,425 out of state versus $131,368 for Hirono. Clearly, Lingle has the overall cash advantage.
One of the most-watched Senate races in the country pits incumbent Republican Scott Brown against Elizabeth Warren. Brown's chances depend on Mitt Romney's showing in Massachusetts, which he governed in 2003-07. Massachusetts voted heavily for Obama in 2008, and no Republican presidential candidate has taken Massachusetts since 1984. Still, Brown managed a big upset to win the late Democratic icon Ted Kennedy's former Senate seat in a special election in 2010, becoming the state's first GOP senator since 1972. This was completely unexpected—a so-called fat-tail event.
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Bill Clark/Newscom
Sen. Claire McCaskill (D-Mo.)
Brown has raised 59% of his $5.6 million in campaign funds in-state, versus 42% of $2.4 million for Warren. Our analysis says Brown will win if Romney has a decent showing in the state.
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CONVENTIONAL WISDOM is that the GOP will lose as many as three seats in the House in 2012 but will retain control of that chamber. Barron's estimates that the party will emerge from the election with 243 House seats, versus 192 for the Democrats. The make-up of the House today is 242 Republican seats, 190 Democratic seats, and three vacancies.
In the House, redistricting has given the Democrats a leg up in states like California and Illinois, where they always run strongly anyway. But in most places, GOP redistricters managed to protect the seats won in the 2010 spanking of the Democratic Party. "On the GOP side, Texas, North Carolina, Indiana, and Georgia are going to balance out Democratic gains in California and Illinois," says Morgan of Applied Research. "When you add all states up, there might be a couple seats in favor of the GOP, a tremendous victory because of its sizable 2010 gains."
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Illinois lost a congressional seat because of a population decrease and now has a total of 18. The redrawn districts favor the Democrats. Morgan says they could pick up three seats there from Republicans, which matches our estimate. Republicans, however, controlled the redistricting process in North Carolina and should pick up four new seats there, Morgan says. Our analysis comes up with a two-seat GOP pickup.
Republicans in 2010 won a lot of Southern seats formerly held by so-called Blue Dog Democrats, who were fiscally conservative but socially left-of-center. Many were voted out of office by conservative Democrats angered by their support for Obamacare and the economic stimulus. Will these conservative Democrats stick with the Republicans they put in place? Morgan, who has been studying redistricting, demographics and voter behavior since the early 1990s, believes that they will: "Once these seats in the South flip, they seldom go back."
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Javier Rojas/Landov
Gov. Linda Lingle (R-Hawaii)
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Arkansas Democrats believe a redrawing of the map of District One last year will help them take it back from Republican Rick Crawford. Jay Barth, a political scientist at Hendrix College in Conway, Ark., and a former Democratic candidate, says that Crawford has been a weak incumbent, in that he has kept a very low profile. The district was extended dramatically southward, where Crawford is virtually unknown and where there are lots of African-American voters. Democrats are running a popular state legislator against him.
In Arizona, redistricting created a new urban district that clearly favors the Democrats, says Luis Heredia, executive director of the state's Democratic Party.
The state, enjoying a surge in population, has gone from eight congressional districts to nine. Since redistricting, as many as five seats, possibly six, now are in play, he says. The GOP won control of five of the eight seats in 2010. (A June special election will be held to fill Gabrielle Giffords' seat. The Democrat, gravely wounded by a gunman who opened fire at a constituent event, is stepping down in order to recover from debilitating brain injuries.) Our analysis shows the balance of power in Arizona flipping to the Democrats. We project the party will win five of the state's nine seats in Congress.
This time around, Republicans have the money, the redistricting advantage and the voters' righteous anger. Come Nov. 6, that's going to be a bigger advantage than most political experts now expect.
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