* 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:
1. 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.
2. 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.
3. 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