GS on CA-50
DAILY FINANCIAL MARKET COMMENT 06/07/06 Goldman Sachs Economics
The result of yesterday’s special Congressional election in the San
Diego area bolsters our view that Democrats will pick up seats in
both the House and Senate this autumn, but remain shy of majorities
in both chambers.While former Rep. Brian Bilbray’s (R-CA) margin of victory was
narrower than normal in this Republican leaning district, it was
wider than what had been thought only a week ago when some predicted
an upset by Democrat Francine Busby. Busby’s performance was not much
better than Senator John Kerry’s (D-MA) in the district two years ago
and is even less impressive when factoring in the performance of two
conservative third party candidates.The election has at least two implications for the economy and
financial markets. First, continued Republican control of Congress
would likely benefit firms in the pharmaceutical, energy, and oil
services sectors. Second, Bilbray’s skillful use of his anti- immigration position means that reform in this area is even less
likely this year.
California Win Boosts GOP Chances of Retaining Control of Congress
The result of yesterday’s special Congressional election in the San
Diego area (California’s 50th District) bolsters our view that
Democrats will pick up seats in both the House and Senate this
autumn, but remain shy of majorities in both chambers.
Former Rep. Brian Bilbray’s (R-CA) five percentage point victory last
night over Democrat Francine Busby in the election to fill the
Congressional seat vacated by imprisoned former Rep. Duke Cunningham
(R-CA) is a slightly stronger than anticipated performance for the
Republican. A week ago many political prognosticators were calling
for a much closer Bilbray win or even a Busby upset in this normally
Republican-leaning district. Last night’s result allows the GOP to
breathe a sigh of relief, as a defeat would have been devastating for
fundraising and other factors crucial to retaining its majority in
the House of Representatives in this fall’s midterm elections.
The district is seen as a reliable but not overwhelmingly Republican
district, as evidenced by President Bush’s 55%- 44% advantage over
Senator John Kerry (D-MA) here during the 2004 Presidential election.
Presidential results in Congressional districts are usually a good
yardstick for analyzing party performance in legislative races. With
that said, a number of factors unique to the area influenced the
result, including:
Immigration. Bilbray’s strong anti-illegal immigration views
played well in this district located only 25 miles from the Mexican
border. Busby took a more centrist position.Appeal to social conservatives. Bilbray’s more moderate views on
social issues were somewhat of a liability in a low turnout special
election in which the enthusiastic support of socially conservative
party activists takes on added importance for Republicans. This may
also have driven some voters to the two more conservative third party
candidates in the race.Contested Democratic gubernatorial primary. Busby may have
benefited from higher turnout due to the close Democratic
gubernatorial primary also on the ballot. In contrast, Gov. Arnold
Schwarzenegger (R-CA) ran unopposed in the primary giving Republicans
little other incentive to go to the polls.
Based on last night’s results, we feel slightly more confident in our
previous expectation that Republicans will retain control of the
House this fall, albeit by a narrow margin. (Indeed, the odds of
Republicans’ retaining control of the House have increased slightly
from 48% to 50% on Tradesports.com since the news of Bilbray’s win.)
Republicans currently hold a 232-203 advantage in the House, so
Democrats must pick up 15 seats to regain control. Our projections
suggest an 11-seat Democratic pickup in the House, leaving them just
short of a majority. The odds are even longer in the Senate where
Republicans hold a 55-45 majority, and we think the Democrats are
likely to pick up 2-3 seats.
Why does a continuing Republican majority look more likely? Despite
what appeared to be a favorable backdrop for a Democratic challenger,
Busby’s performance was not particularly strong. Cunningham’s
imprisonment after pleading guilty to corruption and bribery charges
in his relationship with Washington lobbyists presented a tailor-
made scenario for the Democratic message of a ‘culture of corruption’
in the GOP-controlled Congress. The fact that Bilbray was a lobbyist
only added to Republican anxieties. But Busby’s 45 percent of the
vote was not much better than Senator Kerry’s performance in 2004,
and is even less impressive when one factors in the five percent of
the vote that conservative third-party candidates received.
This year’s 30 most competitive Republican seats on average lean 3
percentage points further toward Republicans (based on 2004 election
results) than the national average. This means Democrats are going to
have to win in at least several Republican-leaning areas similar to
CA-50 if they have any hope of regaining control of the House.
Yesterday’s result does not bode well for them in these districts.
If one extrapolates the reduced Republican margin (compared to that
district’s 2004 presidential results) in yesterday’s special election
to competitive Republican seats across the country, about 15
Republican House seats would theoretically look vulnerable to a
Democratic takeover. The race-by-race factors (candidates, issues
involved) are more important than such statistics, but this also
implies that while the election will be close, Democrats still face
an uphill battle. That said, Republicans can’t rest easy: they spent
a whopping $5 million in California to win a seat where the party
currently has an 11 percentage point registration advantage (versus
$2.5 million spent by the Democrats). Continued Republican control
should bode well generally for pharmaceuticals, integrated energy,
and oil services companies. Healthcare stocks seem to be reacting
modestly favorably to the news today.
Another significant takeaway from last night’s result is its negative
impact on the prospect for a compromise on an immigration bill in
Congress this year. Bilbray’s skillful use of his anti-immigration
position was crucial to his victory in the end. We think House
Republicans opposed to the Senate bill which gives illegal immigrants
a legal path to citizenship will point to Bilbray’s campaign as a
reason to more aggressively resist reform.
Chuck Berwick Alec Phillips