Republicans won two gubernatorial seats in Tuesday elections.
Democrats continued with a strong majority in the House—but expect more movement toward the center as next year's mid-term elections roll around.
Republicans and Democrats need to continue appealing to Independents to keep their seats and will do so by moderating their stances.
Expect political rhetoric to continue, but also expect markets to continue rising as very little in the way of new legislation gets passed.
In Tuesday night's elections, Republicans seized gubernatorial seats from Democrats in Virginia and New Jersey. And while two governorships won't make or break the Democrats' current stronghold, Republican Chris Christie's New Jersey win came as a shock—after all, NJ has long been one of the bluest of the blue states.
Though the losses were the subject of much media attention, House Speaker Nancy Pelosi happily pointed out Democrats have actually increased their majority in the House with a win in a northern New York district special election—taking a seat Republicans held since the Civil War. Since governors don't vote on federal legislation anyway, the election results should technically make voting on landmark issues like health care, cap and trade, etc., a smidge easier for Democrats. Shouldn't it?
Republican and Democrat voters didn't determine the recent elections. Rather, the results were decided, by and large, by Independent voters—a shot across the bow to Democrats looking to a 2010 re-election. Obama won New Jersey by 15% and Virginia by 6% in 2008. Just one year later, Republicans won by 4% and 17% spreads, respectively—a big 19% and 23% swing from blue to red. Considering Democrats will vote for the D, and Republicans for the R, that's a big Independent defection from the D column in just 12 months.
Democrats, particularly vulnerable freshmen up for their first re-election, won't be insensitive to that swing (though the President claims he is—and we have a Bay Bridge to sell you). Anxious to hang onto (or even win back) those valuable Independent votes, as well as their big majority, Democrats will continue moderating—just as we've seen all year. Sure, talk has been big on ramming through health care, but after delay upon delay, on Wednesday Senate Majority Leader Harry Reid all but admitted a vote may not come until 2010. And perhaps not even then. Health care reform may seem more useful to Democrats as a "wedge" issue—one they can raise campaign funds on. All this will make passing anything material much less likely.
We expect more movement toward the center from all politicians—at least from those who want to get re-elected (in other words, all of them). This rush toward the center is good news for investors, since political meddling often heightens risk aversion and fear of large scale redistribution of money and property rights. Expect political rhetoric to continue as always, but also expect legislators to, in practice, keep beating a path to the middle. Which, for stocks, is very bullish.