EmailThe impact of the South Carolina primary results are being blown way out of proportion by the media's need for up-to-the-second over-analyzing. Mitt Romney, despite the South Carolina primary results, is still likely to be the Republican nominee for president. President Obama is the favorite for re-election. And the Republicans will hold the House and may well take the Senate.
South Carolina
The South Carolina primary results are a massive earthquake upending the global political order -- until the next debate or at most until the Florida primary on January 31.
Newt Gingrich won a solid 12-point victory in a state that neighbors his home base of Georgia. It gives his campaign a much-needed boost. Yet, it really isn't that surprising.
In November and December, before the Iowa caucuses, Gingrich led in the polls there by 15 to 20 points.
At that time, it was conventional wisdom that Romney, a moderate Mormon from Massachusetts, had no chance to win in a conservative southern state such as South Carolina.
Gingrich's win keeps him in the race, but still provides no indication that Gingrich can consistently challenge Romney outside of Gingrich's home base.
Remember, Gingrich came in fourth in Iowa and fifth in New Hampshire.
Romney came in second in Iowa, first in New Hampshire (near his home base) and second in South Carolina. Romney still has a vastly superior organization, far more money than Gingrich, and results so far indicate a wider national appeal.
The results are far more devastating to Santorum. He finished fifth in New Hampshire, fourth in South Carolina, and is looking at third or fourth in Florida. His Iowa victory is old news and he may not have the resources to continue after Florida.
Paul will continue on no matter what, but will not win the nomination.
The calendar now heats up fast and favors Romney.
The Florida primary is January 31. Maine and Nevada vote February 4. Colorado, Minnesota, and Missouri are February 7. Arizona and Michigan are February 28. Then there are a slew of primaries in March, including 11 on March 6.
If Gingrich loses Florida, he may have trouble continuing a viable campaign. Maine, Nevada, Colorado, and Minnesota are all more favorable to Romney than Gingrich. If Romney wins Florida, he could quickly put together a string of victories that puts Gingrich's South Carolina win in the same category as Santorum's Iowa victory -- a temporary boost that didn't alter the basic dynamics.
The South Carolina results certainly make for a more interesting race: it isn't over.
The political reporters don't have to pack their bags and head back to DC. They get to continue on the trail and keep dreaming about writing the next "The Making of the President."
Nevertheless, Romney remains a strong favorite to garner the nomination. The intrade.com website, which allows betting on political events, has Romney as a 69% favorite to be the GOP nominee.
The Presidential Race
There will be talk that the Obama administration is thrilled that the Republican primary is continuing, and that candidates are beating up on each other.
This is undoubtedly true, but not meaningful in the long term.
Baseball spring training, the full regular season, and the World Series will be played before the November election. The new NFL season will be well underway, as will the next NBA season. The election is a long way off. And in politics, as the swings in South Carolina show, a couple of weeks can be a lifetime.
If Romney wraps up the GOP nomination by mid-March, there will be plenty of time for the Republican Party to coalesce. There will be plenty of time to "inoculate" the issue of Romney's wealth.
The issues of today will fade, much as Obama's Jeremiah Wright problem faded. The myopia in politics is no different than in the stock market. The stock market thought the nuclear problem in Japan would define profits for years, and then forgot about the issue a few months later.
The race for the presidency will start anew in the spring, and not heat up until September. And Obama will have distinct advantages.
First, Obama has the advantage of incumbency. This is huge. Second, the press has been supportive of Obama and that will continue. Third, the economic trends are improving to the advantage of Obama.
Economic conditions are very poor, but the simple fact is that the trends are good.
Unemployment has fallen from 10% to 8.5% over the past year and payroll gains are likely every month from now until the election.
Real GDP is steadily rising. Not booming of course, but by November it will have been three years since there was a negative number in real GDP.
The stock market has been already rallying for three years. The rally is likely to continue, and it is even possible that by November the talking heads on CNBC will notice that stock prices are up.
An improvement in the economic trends may well provide Obama with the opportunity to argue that he inherited a difficult situation and, much as Reagan was able to do, convince voters to stay the course.
Obama is a 56%-44% favorite for re-election on the intrade.com site. That seems reasonable.
Congress
The Republicans will hold the House of Representatives even if Obama wins re-election.
The GOP currently holds a 242-193 advantage in the House. The Democrats would need to pick up 25 seats to take control. That is extremely unlikely.
Americans are heavily inclined to vote for incumbents except in times of massive change. An Obama re-election hardly qualifies as such.
Furthermore, the Republicans oversaw reapportionment in many key states. In Pennsylvania, Ohio, North Carolina, Georgia, Texas, Michigan, Florida, Wisconsin, and other states, the Republicans drew the congressional lines. This is an advantage that is almost impossible to overstate.
Being the party with a strong majority in the House, the new lines were generally not drawn to give the Republicans opportunities to gain seats. Instead, the lines were drawn to strengthen incumbents.
This, along with extremely high re-election rates for incumbents, means that the Republicans will easily hold the House. The highly regarded Cook Political analysis (http://cookpolitical.com/charts/house/competitive_2012-01-19_13-37-44.php) shows only 30 Republican seats at risk, while Democrats have 23 seats at risk with five of those likely to be Republican.
The Senate
The Republicans are likely to pick up Senate seats and will probably take control of that chamber.
The Senate is currently 53 Democrats and 47 Republicans. The Republicans need four seats to take control. That happens to be our exact forecast.
Senate elections tend to be tied far less to national trends than House elections. They are more a function of the State's political leanings, whether there is an incumbent, and the strength of individual candidates. The Republicans have large advantages.
The Democrats have 23 seats to defend, while the Republicans only have 10.
In eight states, the Democrats are defending seats in a Republican-leaning state. In six, Democrats have retired. The specifics are as follows.
The Republicans are likely to take the following seats:
- North Dakota, a heavily GOP state in which the Democrat Senator has retired.
- Nebraska, a heavily GOP state in which the Democrat Senator has retired.
- Montana, a heavily GOP seat in which the first-term Democrat Senator beat a highly-damaged incumbent 51-49 last election.
- Missouri, a GOP leaning state in which the first-term Democrat Senator won 50-47 last election and will face a strong opponent.
- Wisconsin, a GOP leaning state in which the Democrat has retired and the GOP has stronger candidates.
The Democrats are likely to take:
- Massachusetts, a heavily Democrat state in which a Republican squeaked in through a special election.
There is a long way to go, and these predictions are tentative, but they show that the Republicans are much better situated than Democrats heading into this cycle.
Additionally, while the Republicans may not take Wisconsin, the GOP also has excellent prospects in Virginia (where the Democrat is retiring), and decent prospects in Ohio, Florida, Hawaii, and New Mexico. The Democrats' only chance to gain a seat other than Massachusetts is in Nevada.
The odds favor the Republicans.
What It All Means
First, the hyperventilation over each primary shouldn't concern investors. The matter will soon be cleared up, and Romney remains a very strong favorite to win the Republican nomination. Romney is probably better for financial markets than Gingrich.
Second, Obama is a favorite for re-election. National discontent is very high and economic problems remain serious. Nevertheless, the Republicans don't have a strong candidate in either Romney or Gingrich, and economic trends will steadily support Obama.
Third, the Republicans will hold at least one, and probably both, chambers of Congress after the next election.
This means that continued gridlock is likely. Whether that is good or bad for the financial markets is debatable. To many, it will be seen as bad, because there will be continued talk that Washington is incapable of solving problems. To some, it may seem beneficial if a rising economy lifts tax revenue over time and a Republican congress holds the line on new spending programs.
