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Is Falling Stock Market the Death Knell for Dems?

Is Falling Stock Market the Death Knell for Dems?

By James Piereson - October 16, 2014

The Democrats are already facing substantial headwinds in this year's midterm elections: they are defending 21 of 37 Senate seats up this year, President Obama is a drag on the ticket with overall popularity hovering around 40 percent, things seem to be falling apart in the Middle East, and the economy continues to grow at a tepid pace, buoyed up to now by a record-breaking stock market. Election forecasters have conceded the House of Representatives to the Republicans and are giving Republicans very good odds of capturing the Senate.

Now, in the last two weeks the stock market has undergone a substantial correction that may yet turn into a full blow crash. The Dow Jones Industrial Average has dropped by about 1300 points since October 1, falling from around 17,200 to 15,900 as of late afternoon on October 15. The S&P 500 and NASDAQ have fallen by similar proportions. All told, the U.S. stock markets have lost close to $1.6 trillion in wealth in the past two weeks. By all appearances, the correction has not yet run its course. The markets could fall still further on worries about slow growth in Europe and the United States, and a general sense that events are spiraling out of control.

The stock market correction may prove to be the last nail in the coffin for Democrats as we look ahead to the elections in less than three weeks. Voters, long feeling the effects of slow income growth, will be scanning their retirement accounts in the coming days and calculating how much of their wealth has flown out the window in just the past few weeks. In an investor society millions of people follow the markets on a daily basis, and exchange views and worries colleagues, friends, and family members. It will not take long for anxiety about the stock market to translate into decisions to send a message to the party in power on election day.

The economist Ray Fair of Yale University has put together a reliable model that predicts the two party share of the congressional vote on the basis of a few economic variables, inflation and GDP growth prominent among them. Up until a few weeks ago, his model was predicting a more or less even split between the two parties in the national popular vote that would translate into something close to a stalemate in Senate and House seats gained or lost. The polls up until recently, while leaning in a Republican direction, have remained stubbornly close in most Senate races -- within a range of from 1 to 5 points. The results from Professor Fair's models are generally consistent with these poll results -- at least up to now.

But his model does not take into account surges and declines in the stock market, primarily because there has been little evidence in the past that the performance of those markets has much to do with election outcomes. That is a point well taken. But things are different today. For one thing, many more people than in the past own IRAs, 401k's, and investment accounts of different kinds. They are precisely the kinds of people most likely to turn out in midterm elections. In addition, the stock market "correction," if that is what we should call it, is taking many people by surprise. Few saw it coming. Moreover, as it is taking place in the final weeks of the campaign, it provides additional election ammunition for the Party out of power --much as the financial crash of 2008 aided Barack Obama and his party during that election campaign.

Knowing all this, the Secretary of the Treasury has no doubt been on the telephone today to Janet Yellen to urge the Federal Reserve to offer some encouragement to the stock market -- probably in the form of assurances to keep interest rates low or to renew the central bank's bond buying program. It is unclear that these palliatives will do much good at this point; they probably won't. But the President has to try something, if only to get his Party through the next few weeks and beyond the election.

It will be interesting to see how the polls break over the next several days in response to the correction. If the market does not bounce back by several hundred points over the next few days, look for the momentum to move decisively in a Republican direction by the end of next week. 

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James Piereson is president of the William E. Simon Foundation and a senior fellow at The Manhattan Institute.

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