Democratic Senator Timothy P. Johnson's sudden affliction with "congenital malformation", more commonly known as brain hemorrhaging, is a tragic and doleful thing, specifically in the midst of the holiday season.
Mr. Johnson's future capacity to maintain his position as the senior Senator of South Dakota has raised questions about the balance of power in the Senate. While such an event could potentially cause a great deal of political rancor and worry, we don't believe it will affect stocks adversely.
As a result of the US mid-term elections, the Senate stands at 49 Democrats and 49 Republicans. The two independent Senators both caucus with the Democrats, giving them a 51 to 49 majority. If Senator Johnson proved unable to fulfill his duties, the Governor of South Dakota (who is a Republican) is empowered to choose a replacement.
There are three possible outcomes: First, Senator Johnson recovers fully and retains his seat in Congress. Second, the Governor appoints a new Democratic Senator in Mr. Johnson's absence. And lastly, the Governor could appoint a new Republican Senator to fill the role.
It should be made clear that we do not know the likely outcome, nor is it useful to speculate at this point. In the first two cases, the Democrats retain a narrow majority and nothing changes. In the third case, however, the Republicans would achieve a 50 to 50 tie in the Senate by picking up that single seat, thereby delivering the majority with Vice President Cheney's tie-breaking vote.
We can easily envision a great deal of vicious politicizing as both parties vie to get that pivotal seat. But no matter the outcome, it's not an event big enough to spook stock markets—evidenced by this week's rally and in particular today's strength in the S&P 500.
Whether the Senate is controlled by the GOP or not, the swapping of a single seat doesn't make the passage of meaningful legislation any more likely than it was before. A narrowly Democratic House, a lame duck President, and a razor-thin margin either way in the Senate all have the same ultimate message: legislative stalemate. And markets love regulatory inaction.
A tragedy? Of course. But not one severe enough to sink stocks.
Here's some greater detail on the situation:
Sen. Johnson Is in Critical Condition After Undergoing Emergency Surgery
By Sarah Lueck and Jeanne Cummings, The Wall Street Journal
Senator's surgery called 'successful'
By William Watts, MarketWatch