FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
November 1, 2022

IN THIS ISSUE:

1. The Mid-Term Elections: Is A ‘Red Wave’ Really Coming?

2. Commerce Department Reports 3Q GDP Up 2.6% (Annualized)

3. 2022 Mid-Term Elections – What To Watch For Next Tuesday

4. Question Is, How Big of a Win Will It Be For Republicans?

Overview – The Mid-Term Elections: Is A ‘Red Wave’ Really Coming?

The mid-term elections are one week away, and many politicos believe they could result in a Republican landslide. The GOP is very likely to retake control of the House of Representatives, and some believe they could retake the Senate as well by a narrow margin. We’ll see.

In today’s letter, I’ll handicap the mid-term elections for you, as I’ve done for many years and let you know what I expect we’ll see next Tuesday, what races I think are most important to watch and other thoughts I think might be helpful to know as we approach this very important election.

To help me write today’s letter, I’m joined by my long-time colleague Spencer Wright who is one of my Investment Advisor Representatives at Halbert Wealth Management. Spencer has been with me for over 23 years.  In addition to his excellent work with clients on the investment side, he is also an admitted political junkie, just like me.

Below we’ll give you our thoughts and ideas on what to expect next Tuesday, including what may be the most likely surprises. While most pollsters believe the Republicans will enjoy a nice victory next Tuesday, others believe the outcome is now too close to call.

But before we get into that discussion, let me briefly touch on last Thursday’s latest report on 3Q Gross Domestic Product.

Commerce Department Reports 3Q GDP Up 2.6% (Annualized)

Last week, the Commerce Depart released its first “advance” estimate on 3Q Gross Domestic Product. It showed the economy grew by 2.6% (annual rate) in the 3Q following declines of 0.6% in the 2Q and 1.6% in the 1Q. Perhaps this explains why the National Bureau of Economic Research (NBER), the arbiter of when recessions begin and end, never declared the US was in a recession even after two consecutive quarters of negative growth in the first half of this year.

While the latest GDP report was a little stronger than most forecasters expected, the labor market has remained red hot all year, despite the two negative GDP reports earlier this year. Looks like the NBER was right for now.

With the latest strong increase of 2.6% in the 3Q, the economy is now up only a meager 0.4% for the year. Depending on what happens in the 4Q, the economy could end the year in positive or negative territory. This is not assuring.

2022 Mid-Term Elections – What To Watch For Next Tuesday

The mood of the country going into new week’s mid-term elections is glum. As noted above, the economy recorded two consecutive quarters of negative economic growth in the first half, which normally means we are in a recession. Inflation is at 40-year highs, having spiked above 9% earlier this year.

Meanwhile, the Fed is on a serious interest rate hiking mission precisely to get inflation under control, and many Americans and a lot of economists and forecasters worry the Fed will go too far in hiking interest rates and send the economy into a potentially severe recession.

So, the mood of the country this year seems to be that the Democrats, who have controlled both the House and Senate since 2020, need to go.

Most pollsters closely follow the so-called “Generic Ballot” which has consistently favored the Republicans this year. So, what is the generic ballot? The generic ballot is a political poll which asks not which candidate you plan to vote for to represent you in Congress or for president, but rather which political party (Democrat, Republican or Independent) you would vote for if the election were held today.

It’s called the generic ballot precisely because it includes no specific names of candidates. The generic ballot is a voter survey conducted by various polling groups including Gallup, Rasmussen, RealClearPolitics and numerous others. Here’s a chart of the generic ballot this year.

As you can see, the Republicans held a commanding lead in the generic ballot most of this year, but the race tightened in the late summer and fall, with the Democrats pulling ahead slightly in September. The Republicans pulled decidedly ahead again last month, and with just one week until the election, the GOP is widely expected to retake the House and maybe even the Senate next Tuesday.

The Question Is, How Big of a Win Will It Be For Republicans?

As you can see above, the GOP currently holds a generic ballot lead of 2.1. Remember that the graph above is an aggregate of several independent polls, some of which have the Republicans up 4-6 points. Rasmussen has the GOP up 7. So, this election could turn out worse for the Democrats than the 2.1 generic ballot would suggest.

In any event, when the generic ballot favors the party out of power, in this case the Republicans, the out of power party almost always gains seats in the House and Senate.
It should be no different this year.

Nate Silver at Fivethirtyeight.com, a popular pollster, currently gives the GOP an 82% chance of taking the majority in the House. There is even a possibility that the Republicans might capture their biggest majority since the Great Depression. The GOP will likely end up with about 240 seats in the House with a ‘Red Wave’ pushing that number as high as 250 or more.

Retaking the House has been expected for quite a while and is now only a question of the size of the GOP majority. The real fight is taking place for the Senate. This is where you can see the effect of the very negative macro conditions for the Democrats. This is represented by the generic ballot leaning toward the GOP, combined with Joe Biden’s unpopularity. An average of all polls has Biden’s job approval at about 43%. Presidential unpopularity plus soaring inflation and a struggling economy are all converging to hand the GOP the Senate as well.

Three weeks ago I did not think it was likely that the Republicans would take the Senate. What a difference three weeks makes! Virtually all of the polls have shifted toward the GOP candidates in a big way. There are four key races: PA, GA, NV and AZ.

Something to keep in mind: the DNC and its affiliates have out-spent the GOP in these races by massive margins. In the AZ race, for example, Democrat Kelly has out-spent Republican Masters by 10X. But…it may not matter because you can’t ad-buy your way out of a bad economy, soaring inflation and a deeply unpopular president.

Spencer has broken down the four key races noted above as follows.

Pennsylvania - Fetterman (D) vs. Oz (R)

This race has drawn national attention largely due to the unfortunate health of John Fetterman the Democrat candidate. Fetterman suffered a stroke several months back and has had a very difficult recovery. This was on full display in the debate between Dr. Oz and Fetterman last week. Fetterman could not complete sentences and had trouble composing coherent thoughts.

It was, sadly, the worst debate I have ever seen. I feel bad for Fetterman, even though I don’t want him to win. A healthy Fetterman had a real chance to win this seat, which would have been a Democrat pick up. Not to mention, Dr. Oz has run a poor campaign. Were it not for the macro narrative (Red Wave) in his favor and Fetterman’s failing health, Oz likely would have lost. But that was three weeks ago. Now it looks like Oz wins. GOP hold.

Georgia - Warnock (D) vs. Walker (R)

This Georgia race is awful in many ways. The level of mudslinging and personal attacks has drowned-out genuine debate and issues. The Georgia election laws will require a runoff since neither candidate is likely to win with the required margin. So, the voters will be treated to an immediate second round of Warnock’s corruption and Walker’s questionable personal dealings and past. In the end, however, Walker should prevail. GOP gain.

Nevada - Masto (D) vs. Laxalt (R)

This race is interesting. NV has been a Democrat stronghold for many years. But, despite outspending Laxalt by significant margins, Masto is in trouble. So, what went wrong? Apart from the negative macro effect hitting all Democrats, the very powerful Culinary Workers Union did not endorse Masto. They didn’t endorse anyone. Absent their support and with the negative environment, Masto likely loses to Laxalt who ran a sterling campaign. GOP pick up.

Arizona - Kelly(D) vs. Masters (R)

Mark Kelly is a centrist, common sense Democrat. A former astronaut and a very savvy campaigner, he has outspent Masters, who has run a milquetoast campaign, by an order of magnitude. And it may not matter. It is in AZ where we can see the full force of the negative macro environment (Red Wave) at work. Kelly was leading Masters well beyond the margin of error until three weeks ago. Now an aggregate of polls has Kelly ahead by a single point. This one remains a coin flip. But, I think Kelly will hang on and win in the end. Democrat hold.

Who knows if these races will fall out as we have called them. But…the GOP has many avenues to victory. If the GOP holds PA, which given the circumstances there seems likely, then they only have to turn one of the three remaining states.

NV is the most likely of the three. What really scares the Democrats is the GOP now has a real chance of running the table on all four of these races. Three weeks ago, almost no one would have guessed that.

One last thing. It is VERY unlikely that we will know the make-up of the Senate on election night. Due to runoffs, mail-in balloting, etc., we likely will not know for at least one week later.

Thanks Spencer!

Well, there you have it – that’s our forecast for next Tuesday’s mid-term elections. Be sure to vote.

All the best,

Gary D. Halbert

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