Quiet Flows the Don

Well, it happened: absent unexpected reversals from state recounts or from the Courts (see our note on election litigation last Friday), for the first time in 100 years, a challenger unseated an incumbent President at a time of strong economic and market tailwinds (first chart below). The rarity of such an outcome tells you how hard this is to accomplish. However, when looking at the full scope of Federal and state results, the election delivered a clearer referendum on the President himself (a) than on policy issues dividing Democrats and Republicans. Why is that? The second chart shows partisan control of the Senate, the House, Gubernatorial positions and State-level Senates and Houses.  Forget about a “Blue Wave”: according to our Partisan Balance index (b), the Democratic tide actually went out a little bit, falling relative to pre-election levels. The chart illustrates the major party shifts in the 20th and 21st centuries: the decline in the Democratic share from its enormous level during the Great Depression; Eisenhower’s popularity in a country not yet ready for Adlai Stevenson’s liberalism; the two big post-war Democratic waves during the JFK/LBJ Great Society era and the Nixon impeachment era; the GOP rebound following the Reagan Revolution in the 1980’s and Gingrich’s “Contract with America” in 1994; the powerful but very temporary Obama wave in 2009; and the anti-Trump reaction during the 2018 midterms.

The rest of today's Eye on the Market is a playbook for investors for a time of divided government, and was sent out to clients this morning.

Michael Cembalest, JP Morgan Asset Management

“And Quiet Flows the Don” is an epic novel by Mikhail Sholokhov from the early 20th century, describing the lives of self-governing militarized Cossack populations living along the Don River during the Russian Civil War.

(a) Was the Trump administration an actualization of what might have happened had Louisiana Senator Huey Long become President, if he had run against FDR in 1936 and won? Examples: a piece by Adrian Mercer on the LSE American Politics and Policy Blog in April 2018, a piece by Annika Nelson in The Atlantic in March 2019 and “The Demagogue’s Playbook” by Eric Posner at the University of Chicago, which compares Trump to Huey Long, as well as Andrew Jackson, Joseph McCarthy and George Wallace

(b) Partisan Balance Index weights: Senate 25%, House 25%, Governorships 25% and State Senates and Houses 12.5% each. We assume that the partisan balance in the Senate is 51-49 in 2021 (i.e., NC/AK Senate seats go to the GOP, and the GOP wins one of the two Senate runoffs in Georgia), and that the balance in the House ends up at 223 DEM, 212 GOP once outstanding House elections are called and all vacancies are filled