NEW YORK (
) -- The midterm elections of 2014 are 20 months away -- an eternity in politics. But for capital markets, the midterms already matter now.
Democrats seeking to keep their Senate majority will only mostly moderate from here -- creating gridlock on major new legislation -- an additional positive factor for stocks as the risk of extreme legislation dissipates still more.
Some investors fear gridlock means nothing can happen, but that's not so. It means less extreme things can happen. Look at major legislation so far in 2013. It's been mostly as-expected continuing resolutions and extensions of the status quo. The fiscal cliff deal mostly made existing tax brackets permanent. The sequestration wasn't new; it was over a year in the making. (And, in fact, total government spending will rise in 2013). Sweeping legislation is the stuff of a single party wielding either outsized power or tremendous powers of persuasion. We left that world back in 2010.
And Democrats in the Senate know, if they want to keep not just their majority but their jobs, more moderation must be the name of the game. There are signs of it already. Democrats haven't been the most uniformly enthusiastic supporters of the Keystone XL pipeline (which would carry oil from Canadian oil sands and North Dakota's Bakken Shale to Gulf Coast refineries). On paper, the pipeline seems like a bipartisan win-win-win. It's popular (according to some polls, 70% of registered voters support it). It creates jobs. It should alleviate some energy production costs. And politicians on both sides enthusiastically support reducing American reliance on oil from despotic regimes.
But since, as of yet, cars can't run on happy thoughts, there's always the NIMBY issue which tends to affect both sides equally. And the environmental lobby is small, but powerful, and leans heavily Democrat. Hence, in past votes, the pipeline has fallen well short of a filibuster-proof 60 "yeas."
But in an amendment to the Senate budget last week, 17 Democrats joined every Republican in giving the full pipeline a green light, with many of those 17 either up for election in 2014, from traditionally red states or both.
Similarly, an amendment to kill the 2.3% tax on gross sales of medical devices passed decidedly -- 79-20. This tax was an increasingly unpopular aspect of the Affordable Care Act (ACA) and a safe place for Democrats to moderate. It was no accident that implementation of most of the ACA behemoth was booted to 2014, past not just the 2010 mid-terms but the 2012 election as well. As battles heat up in some of the closer races, it's likely we'll see more bipartisan efforts to reverse or alter more aspects of the ACA. And if politicians are moderating on legislation already on the books, there's little chance they'll be eager to pass much of anything major going forward.
Mind you, neither of these are done deals. They were amendments to the Senate budget, which barely passed the easily Dem-dominated Senate, and they won't get much more than an eye-roll in the House. Still, they call them symbolic votes for a reason.
And Democrats need to send a powerful message to constituents. There are 21 Democrat-held seats up for election in 2014 to just 14 Republican -- alone a significant structural Republican advantage. Of the 14 Republican races, 13 are in states Romney carried (including two seats in South Carolina). Just Susan Collins (Maine) is running in a traditionally blue state. But as a three-termer and with solid moderate bona fides, that seat doesn't seem imperiled at the moment. Saxby Chambliss and Mike Johanns are retiring, leaving two open seats in reliably red Georgia and Nebraska.
Democrats face a tougher road. Of their 21 races, seven are in states Romney carried. Tim Johnson (South Dakota) just announced he won't run in 2014 and Jay Rockefeller (West Virginia) is also retiring, making two of those Romney states open races. The Democrats will have a total of five open races, though the three in Michigan, New Jersey and Iowa are probably safe. Still, open seats are tougher to defend.
No doubt, the Democrats would like to take back the House in 2014, a tall order in a normal mid-term. The president's party nearly always loses relative power in mid-terms, as the Democrats did in 2010 and the Republicans in 2006. What's more, the House nearly always goes the same direction as the Senate in mid-terms, and at the very least, the Democrats are structurally set up to lose more relative power. So in the time between now and the midterms, watch for more aisle-crossing and little new legislation -- a powerful boost for stocks.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.