with Bastien Inzaurralde


President Trump argued in his post-election news conference that the Republican Party’s performance in the midterms defied history. An analysis by a JPMorgan economist suggests Trump is right — just not in the way he intends. 

Measured against the strength of the economy, the GOP’s losses in the House mark the worst midterm results for a president's own party in at least a century, per Michael Cembalest, JPMorgan Asset Management’s chairman of market and investment strategy. 

Cembalest put together this chart to illustrate the point: 

The size of the bubbles correspond to the number of seats each president’s party lost in the midterms. The y-axis plots employment and inflation, and the x-axis plots the stock market and home prices. So the bubbles floating in the upper right-hand quadrant represent losses that came despite rosy economic conditions, when inflation and joblessness were low and stock and home values were rising. 

Note that the bubble for 2018 is larger — and further up and to the right — than any in its immediate vicinity. That means the economy was in prime position for Trump's party to succeed in the polls. “You can’t ask for more than that as an incumbent,” Cembalest says. And yet no incumbent party enjoying similar sunniness has managed to rack up as many losses as Trump’s GOP did Tuesday. (Economies for the nearest comparisons, the contests in 1994 and 2006, weren’t nearly as strong).

The result points to the GOP’s failure to turn the midterm into a referendum on the strength of the economy. Instead, Cembalest says, “this was very much a referendum on the unusual circumstances surrounding the way this administration functions.”

A closer look at the districts that Democrats flipped throws the phenomenon into sharp relief: The party romped in urban and suburban districts where voters are largely comfortable, if not wealthy. 

To get a better sense of the profile of those areas, I asked the nonpartisan Economic Innovation Group to map the House results onto their Distressed Community Index. That assessment measures the health of communities on a scale from 1 to 100, with lower scores indicating greater prosperity, by evaluating factors like median income, employment changes, and housing vacancies. The results are telling: The 38 districts that Democrats flipped (or look likely to once the returns are certified) averaged a score of 30.2. That ranks squarely in the middle of second-best quintile, which th e index labels “comfortable.” And 22 of the districts — nearly 60 percent — ranked in the top tier, as “prosperous.”

See the map here

Perhaps no surprise then that exit polls show the economy ranked third among issues voters cited as the country’s top challenge, behind health care and immigration. Those pointing to health care as their top issue broke for Democrats by a three-to-one margin; voters most concerned about the economy went for Republicans by a two-to-one margin. 

Broadly, the election saw the continuation of a trend that’s accelerated under Trump’s presidency, as white collar voters realign behind Democrats, while blue collar voters increasingly back Republicans. “All of these suburban seats were in places where voters are doing best in the buoyant economy, but widespread discomfort with Trump’s style and values ignited a huge backlash among college-educated white voters—primarily women, but also an unusually large number of men,” The Atlantic’s Ron Brownstein writes. “The exit polls put Trump’s approval rating among college-educated white voters at only about 40 percent. Burdened by that verdict, Republican House members were swept away in fast-growing, economically dynamic metro areas.”

That House Republicans could perform so poorly during boom-times raises a scary proposition for the party: What will happen to their political fortunes if the economy starts heading south? “Almost everything they’ve done, with a couple exceptions, has been geared toward to maximizing short-term growth and the stock market at the expense of deficits and how it gets financed,” Cembalest says. “It’s almost like they were doubling down on trying to get a growth boom that would protect them in the midterms. It doesn’t appear to have worked.”

There’s little evidence the midterm outcome will change the economy’s trajectory or that of the stock market. But Cembalest’s report points to a historical example to argue that a showdown over special counsel Robert S. Mueller III's investigation could drag stocks sharply lower. Deteriorating economic conditions sent the S&P 500 into a bear market during the Watergate era, making it tough to assign blame to the political turbulence alone. Yet the Saturday Night Massacre — an event to which Trump's Wednesday firing of Attorney General Jeff Sessions drew comparisons — was a different story. It coincided with the start of a 15 percent drop by the index that didn’t appear to have another catalyst, as this chart demonstrates: 

Cembalest estimates an event that investors recognize as the beginning of another constitutional crisis could precipitate a 10 percent market drop. And that in itself could further weaken the president’s standing. “Unquestionably, the president is more vulnerable when the economy is not as good,” he says. 


Trump says he's open to raising taxes. Bloomberg's Laura Davison: "Trump said he’s open to raising some tax rates to help pay for a bigger tax break for middle-class Americans. 'If the Democrats come up with an idea for tax cuts -- and I’m a big believer in tax cuts -- I would absolutely pursue something even if it means some adjustment,' Trump said during a press conference at the White House on Wednesday. When the reporter asked if that could include a corporate rate increase, Trump said 'Yeah.'"

Bank-friendly Senate Democrats lose. Politico's Victoria Guida and Zachary Warmbrodt: "At least three Senate Democrats who backed the landmark financial deregulation bill this year lost their reelection campaigns despite their efforts to work across the aisle, in a potential setback for the banking industry. Red state senators Joe Donnelly (D-Ind.) and Heidi Heitkamp (D-N.D.), who helped write the bill, and Sen. Claire McCaskill (D-Mo.), who supported it, were all defeated by Republican challengers Tuesday. Sen. Bill Nelson (D-Fla.), who also backed the legislation, was trailing his opponent, Rick Scott, as of Wednesday."

One banking lobbyist emails that the setback for the industry is limited by the fact that the incoming Republicans "are also solid (if not more solid) advocates for the banks." On the other hand, the development could cut against the industry's interests "in so far as it diminishes the chances for bipartisan banking legislation which dials down regulation."

Exodus of the Republican tax-writers. The Hill's Naomi Jagoda: "Half of the 24 Republicans who served in 2017 on the Ways and Means panel — which has jurisdiction over health and trade issues in addition to taxes — will not be back in the House next year, according to election results as of 10 a.m. Wednesday, Four GOP members of the committee are projected to lose their races: Reps. Peter Roskam (Ill.), Erik Paulsen (Minn.), Carlos Curbelo (Fla.) and Mike Bishop (Mich.). Roskam, Paulsen and Curbelo represent districts that Hillary Clinton won in 2016, while Bishop's district went for [Trump] by single digits."

Voters didn't much care about the tax cut. CNBC: "Voters in the midterm elections felt neither tremendously motivated by the 2017 tax cuts nor had their lives been changed much by them, according to NBC News exit polls. Among those interviewed after voting Tuesday, some 45 percent said the tax cuts had no impact on their personal finances."

But they want the new Congress to cut the deficit. "According to a Morning Consult/Politico survey conducted Nov. 2-4, 48 percent of registered voters said reducing the federal budget deficit should be the top priority for Congress, the highest level of interest among finance-related topics," Morning Consult reports

Investigations are coming. And not only for the Trump administration. Just ask the law firm Skadden Arps, Slate, Meagher and Flom, which warns in a memo to clients that "the Trump administration and companies doing business with the president are likely to be embroiled in oversight investigations, as are industries that have been targeted by Democrats in the past (e.g., pharmaceutical manufacturers, financial institutions, for-profit educational institutions, and oil and gas companies)." It advises firms "be prepared with a game plan for responding to a subpoena or other inquiry."


— Stocks rally. The Washington Post's Thomas Heath: “The Dow Jones industrials like a divided government — so far. The blue-chip index notched a more than 500-point gain after Democrats took back the House in last night’s midterms and Republicans strengthened their hold on the Senate. It’s the Dow’s sixth up day in seven sessions, gaining 545 points, or 2.1 percent, to hit 26,180 by the end of trading. Microsoft, UnitedHealth, Pfizer and Caterpillar all spearheaded the rise among the Dow 30 blue chips. Proctor & Gamble was the only company in the red. The Standard & Poor’s 500-stock index and the Nasdaq composite index followed with increases of more than 2 percent . . . ‘With the conclusion of this year’s midterm elections, the cloud of uncertainty has been lifted, allowing stocks to resume their recovery from the October sell-off,’ said Sam Stovall, chief of U.S. equity strategy at CFRA.”

Congressional divide could weigh on the dollar. Bloomberg News's Charlotte Ryan, Shoko Oda and Sydney Maki: “The dollar’s bull run against major currencies could come to an end in 2019 after the Democrats took the U.S. House from the Republicans in the midterm election. While the outcome was largely expected, analysts at Morgan Stanley and Credit Agricole SA say it could lead to a gridlocked government during the rest of [Trump’s] term, undermining efforts to extend tax cuts and boost infrastructure spending. This could weigh on the greenback, which has outperformed all Group-of-10 peers so far this year. For Treasuries, the result is likely to herald lower yields as the market moves to price out further stimulus, according to analysts.”

Fed's tone will hint at its path. Bloomberg's Steve Matthews: "Federal Reserve policy makers meeting in Washington will weigh how to describe a moderation in U.S. economic growth as they reinforce expectations for a fourth 2018 hike next month. The Federal Open Market Committee is widely expected to keep the benchmark target for rates unchanged in a 2 percent to 2.25 percent range at the conclusion of its two-day meeting on Thursday. Its policy statement, released at 2 p.m., will likely continue to describe U.S. growth and the labor market as strong, reinforcing the outlook for a hike in December. Other tweaks in the statement could suggest less confidence in the need to raise rates three times next year, as officials projected in September."



— Pro-tariff lawmakers escaped voters' ire. Bloomberg News's Andrew Mayeda: “The trade war of 2018 was, in theory, supposed to hurt Republicans in states vulnerable to higher tariffs and Chinese retaliation. The results from Tuesday’s midterm elections suggest that didn’t really happen. . . . [Trump’s] tariffs were a hot topic in farming regions and the Rust Belt — places with a lot to lose in the dispute with China, which countered with duties on iconic American exports from soybeans to lobsters. Yet several candidates who opposed Trump’s tariffs were defeated, while some who backed the duties won their races.

"The outcome gives the U.S. president little incentive to soften his hawkish trade strategy. . . . The Republicans did suffer some losses in farm states. Democrats flipped two seats in Iowa, where corn and soybean farmers have complained about tariffs. Democrat Abby Finkenauer won in the state’s first district, while Cindy Axne prevailed in the third district.

— Trump and Democrats could cooperate on trade. Bloomberg News's Jenny Leonard: “Trump may be encouraged to pursue more protectionism and could even get a hand from Democrats on his trade agenda — a rare area of potential cooperation that will test his willingness to bargain with a new negotiating partner, likely to be Democratic leader Nancy Pelosi... One place Democrats could push for a tougher stance is on currencies. Trump promised on the presidential campaign trail that he would label China a currency manipulator, but has stopped short of doing so in the four foreign-exchange reports released since he took office in January 2017.”

Probably no deal at Trump-Xi meeting. Politico's Doug Palmer: “With the election over, attention now shifts to an upcoming meeting between Trump and Chinese President Xi Jinping at the annual G-20 summit, being held on Nov. 30-Dec. 1 in Buenos Aires. That is more likely to produce an agreement to begin serious negotiations, than an immediate deal that would lead to Trump dismantling his tariffs on about $250 billion worth of Chinese goods and Xi removing China’s own duties on about $110 billion of U.S. exports. ‘Anything more substantive requires preparatory work, particularly given the complicated nature of issues such as intellectual property protection, industrial policies, and so forth. As far as I know, that preparatory work hasn’t been taking place,’ said Phil Levy, senior fellow on the global economy at the Chicago Council on Global Affairs. During a post-election news conference on Wednesday, Trump acknowledged that he would be meeting with Xi at the G-20 but didn’t comment on what would be discussed.”

MORE: The Wall Street Journal's James Areddy writes that trade tensions are on display at the first China International Import Expo in Shanghai, which Trump administration officials declined an invite to attend... The Post's Jeff Stein writes that a Chinese-owed pork producer is in line for assistance from the Trump administration's farm bailout... and Chinese foreign currency reserves declined in October, a signal that the government could be intervening to keep the yuan from sliding too far against the dollar, per the Associated Press.



— Silicon Valley stays in business with Saudi Arabia. WSJ's Eliot Brown: “Silicon Valley startups are continuing to negotiate deals with Saudi Arabia and take its capital through its partner SoftBank Group Corp., amid the controversy over the killing of journalist Jamal Khashoggi that has clouded the kingdom’s role as a global technology investor. Two startups — View Inc., which makes light-adjustable glass, and Zume Inc., which uses robots to make pizza—disclosed investments over the past week totaling a combined $1.5 billion from SoftBank’s Saudi-backed Vision Fund. . . . Within Silicon Valley—a place where chief executives often talk openly about politics and startup founders often say they are out to make the world a better place—the response to the Khashoggi killing and the international backlash of a huge benefactor has been relatively muted.”

— Banks renew approach to data. WJS's Telis Demos: “Wall Street analysts are doing data differently. Banks for years have crunched data on company earnings, price targets and other mundane metrics for clients who might use the information to make investing and trading decisions. Now they are pulling data from social-media sentiment, geospatial mapping and other unorthodox sources. They are also increasingly making their data feeds available directly to clients, without the surrounding research notes that often go unread. The changes are the banks’ latest strategy to try to juice up interest in — and revenue from — their giant research arms that are struggling to stay relevant. Banks have long provided research as part of a bundle of services to trading clients, but now many clients are either pushing to lower their trading bills or are more likely to base their decisions on quantitative algorithms than qualitative research.”


Coming soon

  • Federal Reserve Vice Chairman for Supervision Randal Quarles delivers a speech on financial regulation at the Brookings Institution tomorrow in Washington.
  • Senate Judiciary Committee hearing titled “Big bank bankruptcy: 10 years after Lehman Brothers” on Nov. 13.
  • Senate Banking Committee hearing on “Oversight of pilot programs at Fannie Mae and Freddie Mac” on Nov. 14.
  • Federal Reserve Vice Chairman for Supervision Randal Quarles appears before the Senate Banking Committee on Nov. 15.
  • The National Economists Club holds an event titled “US Outlook: Exploring the Key Debates” on Nov. 15 in Washington.
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