Political parties

All politics is national

Thomas P. “Tip” O’Neill, who notably served as speaker of the House for a decade, was fond of reminding his colleagues that “all politics is local.” His famous tagline was intended to convey a belief that political influence was derived through service to one’s constituents, party loyalty, and an ability to deliver federal largesse to local communities. Much has changed since the former speaker retired almost 40 years ago. All politics is now national. Voters are more reluctant to divide their votes for different offices between the two parties, and the degree of disdain held by each party’s adherents for the other has increased in the past decade.1

While partisanship is not a new phenomenon in the United States, the level of animosity has increased markedly. Social media is one culprit, as is the notable rise in the number of unaffiliated voters, whose exit from active political participation often leaves each party without moderating voices in primary elections. A survey conducted by the Pew Research Center in 2016 showed that 47% of Republicans and 35% of Democrats viewed members of the other party as “immoral.” A similar survey conducted just six years later indicated that almost three-quarters of Republicans and two-thirds of Democrats held that view.2

As the ideological gulf between the Republican and Democratic parties widens, fewer voters appear willing to vote for a candidate for Congress from one party but simultaneously choose a presidential candidate from the other.3 The number of congressional districts that voted for a presidential candidate and a House representative from different political parties declined from 190 in 1972 to just 16 in 2020.4 The same trend is evident in the Senate, where 90% of elections held since 2012 have been won by candidates aligned with the party that won that state’s most recent presidential race.5

None of the presidential candidates is popular with a majority of voters, and a recent Gallup poll reported that 63% of American voters agreed with the statement that both political parties do a “poor job” of representing their interests.6 In that context, it is not surprising that some independent and third-party candidates have received more media attention. However, it is important to keep in mind that these campaigns generally fail to attract the support needed to become competitive in national elections and win enough electoral votes (Fig. 1).

Fig. 1: Independent and third-party campaigns typically are not competitive

1912

Presidential candidate

Presidential candidate

Vice presidential candidate

Vice presidential candidate

Political party

Political party

Electoral vote count

Electoral vote count

% of electoral vote

% of electoral vote

Popular vote count

Popular vote count

% of popular vote

% of popular vote

Presidential candidate

Woodrow Wilson

Vice presidential candidate

Thomas R. Marshall

Political party

Democratic

Electoral vote count

435

% of electoral vote

81.9%

Popular vote count

6,294,327

% of popular vote

41.8%

Presidential candidate

Theodore Roosevelt

Vice presidential candidate

Hiram Johnson

Political party

Progressive

Electoral vote count

88

% of electoral vote

16.6%

Popular vote count

4,120,207

% of popular vote

27.4%

Presidential candidate

William Howard Taft

Vice presidential candidate

Nicholas Butler

Political party

Republican

Electoral vote count

8

% of electoral vote

1.5%

Popular vote count

3,486,343

% of popular vote

23.2%

Presidential candidate

Eugene V. Debs

Vice presidential candidate

Emil Seidel

Political party

Socialist

Electoral vote count

0

% of electoral vote

0%

Popular vote count

900,370

% of popular vote

6.0%

Source: The American Presidency Project, UC Santa Barbara, 2023

1968

Presidential candidate

Presidential candidate

Vice presidential candidate

Vice presidential candidate

Political party

Political party

Electoral vote count

Electoral vote count

% of electoral vote

% of electoral vote

Popular vote count

Popular vote count

% of popular vote

% of popular vote

Presidential candidate

Richard Nixon

Vice presidential candidate

Spiro Agnew

Political party

Republican

Electoral vote count

301

% of electoral vote

55.9%

Popular vote count

31,785,480

% of popular vote

43.4%

Presidential candidate

Hubert Humphrey

Vice presidential candidate

Edmund Muskie

Political party

Democratic

Electoral vote count

191

% of electoral vote

35.5%

Popular vote count

31,275,166

% of popular vote

42.7%

Presidential candidate

George Wallace

Vice presidential candidate

Curtis LeMay

Political party

American Independent

Electoral vote count

45

% of electoral vote

8.4%

Popular vote count

9,906,473

% of popular vote

13.5%

Source: The American Presidency Project, UC Santa Barbara, 2023

1980

Presidential candidate

Presidential candidate

Vice presidential candidate

Vice presidential candidate

Political party

Political party

Electoral vote count

Electoral vote count

% of electoral vote

% of electoral vote

Popular vote count

Popular vote count

% of popular vote

% of popular vote

Presidential candidate

Ronald Reagan

Vice presidential candidate

George H.W. Bush

Political party

Republican

Electoral vote count

489

% of electoral vote

90.9%

Popular vote count

43,904,153

% of popular vote

50.7%

Presidential candidate

Jimmy Carter

Vice presidential candidate

Walter Mondale

Political party

Democratic

Electoral vote count

49

% of electoral vote

9.1%

Popular vote count

35,483,883

% of popular vote

41.0%

Presidential candidate

John Anderson

Vice presidential candidate

Patrick Lucey

Political party

Independent

Electoral vote count

0

% of electoral vote

0%

Popular vote count

5,720,060

% of popular vote

6.6%

Source: The American Presidency Project, UC Santa Barbara, 2023

1992

Presidential candidate

Presidential candidate

Vice presidential candidate

Vice presidential candidate

Political party

Political party

Electoral vote count

Electoral vote count

% of electoral vote

% of electoral vote

Popular vote count

Popular vote count

% of popular vote

% of popular vote

Presidential candidate

Bill Clinton

Vice presidential candidate

Al Gore

Political party

Democratic

Electoral vote count

370

% of electoral vote

68.8%

Popular vote count

44,909,326

% of popular vote

43.0%

Presidential candidate

George H.W. Bush

Vice presidential candidate

Dan Quayle

Political party

Republican

Electoral vote count

168

% of electoral vote

31.2%

Popular vote count

39,103,882

% of popular vote

37.4%

Presidential candidate

Ross Perot

Vice presidential candidate

James Stockdale

Political party

Independent

Electoral vote count

0

% of electoral vote

0%

Popular vote count

19,741,657

% of popular vote

18.9%

Source: The American Presidency Project, UC Santa Barbara, 2023

1996

Presidential candidate

Presidential candidate

Vice presidential candidate

Vice presidential candidate

Political party

Political party

Electoral vote count

Electoral vote count

% of electoral vote

% of electoral vote

Popular vote count

Popular vote count

% of popular vote

% of popular vote

Presidential candidate

Bill Clinton

Vice presidential candidate

Al Gore

Political party

Democratic

Electoral vote count

379

% of electoral vote

70.4%

Popular vote count

47,402,357

% of popular vote

49.2%

Presidential candidate

Bob Dole

Vice presidential candidate

Jack Kemp

Political party

Republican

Electoral vote count

159

% of electoral vote

29.6%

Popular vote count

39,198,755

% of popular vote

40.7%

Presidential candidate

Ross Perot

Vice presidential candidate

Pat Choate

Political party

Reform

Electoral vote count

0

% of electoral vote

0%

Popular vote count

8,085,402

% of popular vote

8.4%

Source: The American Presidency Project, UC Santa Barbara, 2023

2000

Presidential candidate

Presidential candidate

Vice presidential candidate

Vice presidential candidate

Political party

Political party

Electoral vote count

Electoral vote count

% of electoral vote

% of electoral vote

Popular vote count

Popular vote count

% of popular vote

% of popular vote

Presidential candidate

George W. Bush

Vice presidential candidate

Dick Cheney

Political party

Republican

Electoral vote count

271

% of electoral vote

50.4%

Popular vote count

50,455,156

% of popular vote

47.9%

Presidential candidate

Al Gore

Vice presidential candidate

Joe Lieberman

Political party

Democratic

Electoral vote count

266

% of electoral vote

49.4%

Popular vote count

50,992,335

% of popular vote

48.4%

Presidential candidate

Ralph Nader

Vice presidential candidate

Winona LaDuke

Political party

Green

Electoral vote count

0

% of electoral vote

0%

Popular vote count

2,882,738

% of popular vote

2.7%

Source: The American Presidency Project, UC Santa Barbara, 2023

2016

Presidential candidate

Presidential candidate

Vice presidential candidate

Vice presidential candidate

Political party

Political party

Electoral vote count

Electoral vote count

% of electoral vote

% of electoral vote

Popular vote count

Popular vote count

% of popular vote

% of popular vote

Presidential candidate

Donald Trump

Vice presidential candidate

Mike Pence

Political party

Republican

Electoral vote count

306

% of electoral vote

56.9%

Popular vote count

62,955,340

% of popular vote

46.2%

Presidential candidate

Hillary Clinton

Vice presidential candidate

Tim Kaine

Political party

Democratic

Electoral vote count

232

% of electoral vote

43.1%

Popular vote count

65,788,564

% of popular vote

48.2%

Presidential candidate

Gary Johnson

Vice presidential candidate

William Weld

Political party

Libertarian

Electoral vote count

0

% of electoral vote

0%

Popular vote count

4,487,570

% of popular vote

3.3%

Presidential candidate

Jill Stein

Vice presidential candidate

Ajamu Baraka

Political party

Green

Electoral vote count

0

% of electoral vote

0%

Popular vote count

1,448,603

% of popular vote

1.1%

Source: The American Presidency Project, UC Santa Barbara, 2023

Potential scenarios

Looking ahead to November

Once President Joe Biden announced he would seek a second term, he immediately became the presumptive Democratic nominee. Former President Donald Trump’s path to the nomination initially was less certain due to the presence of numerous competitors, but he handily won both the Iowa caucuses and the New Hampshire primary to become the presumptive Republican nominee. Former South Carolina Governor Nikki Haley remains in the race but faces an uphill battle for the nomination.

As we have discussed in prior ElectionWatch reports, US presidents enjoy an extraordinary degree of autonomy in the management of foreign relations and national security. However, in the execution of domestic policy, presidents generally must work with Congress to achieve an enduring legacy. This often requires a unified government, where both chambers of Congress are controlled by the same party as the president. For examples, look no further than the enactment of the Affordable Care Act in 2010 under unified Democratic control and the Tax Cuts and Jobs Act in 2017 under unified Republican control.

With the presidency and both chambers of Congress being contested in 2024, there are eight potential election outcomes. While any one of them is theoretically possible, we believe four scenarios are more likely than others. Republicans are favored to assume control of the Senate because Democrats are defending more seats in this cycle, and some of their candidates are particularly vulnerable. Majority control of the House is more difficult to predict because of the exceedingly narrow margin of control that Republicans now enjoy. Some state governments are still altering the boundaries of congressional districts, which could affect the outcome of elections in November. It is far too early to make a prediction about the outcome of the presidential race, but in Fig. 2 we have set forth the most likely outcomes for control of Congress based on who will occupy the Oval Office in 2025. Please note that we have illustrated the four scenarios that strike us as more likely outcomes. We plan to provide more precise probabilities later this year.

Fig. 2: Scenarios for control of Congress based on who wins the presidential race

Scenario

Scenario

Possibility if Biden wins

Possibility if Biden wins

Possibility if Trump wins

Possibility if Trump wins

Scenario

Republican Senate and Democratic House

Possibility if Biden wins

Possible

Possibility if Trump wins

Possible

Scenario

Republican Senate and Republican House

Possibility if Biden wins

Unlikely

Possibility if Trump wins

Possible

Scenario

Democratic Senate and Democratic House

Possibility if Biden wins

Possible

Possibility if Trump wins

Unlikely

Scenario

Democratic Senate and Republican House

Possibility if Biden wins

Unlikely

Possibility if Trump wins

Unlikely

Source: UBS

National polls

Nine months is a long time in politics

Political fortunes can shift appreciably over the course of a long presidential campaign. Barring an unexpected withdrawal by either Biden or Trump due to health concerns or legal challenges, the two candidates will be engaged in an acrimonious campaign for the next nine months. This will be a test of endurance for American voters, who will be subjected to incessant media coverage and repetitive advertising. The impact will be most pronounced in the six states that will decide the election outcome.7 

As we indicated in our last ElectionWatch report, national polls should be treated with skepticism because US voters choose presidents based on the outcome of votes cast in the Electoral College.8 As a result, support from voters in “swing states” is relatively more important in the general election than the margin of victory in states where one party or the other is expected to win. With that said, it is also important to remember that public opinion can change substantiably in the runup to Election Day. So national polls in February are unlikely to offer much clarity about the outcome.

For example, Governor Jimmy Carter held a 33-point advantage over incumbent Gerald R. Ford in July 1976, but Ford closed the gap in the ensuing months and only lost the election by two points. Four years later, national polls initially showed Carter with a commanding lead over Ronald Reagan. Reagan, of course, ended up winning in a landslide.9 Democratic Governor Michael Dukakis led incumbent Vice President George H.W. Bush by 17 points in July 1988, but Bush won. Four years after that, the narrative was reversed. Bush’s early lead in the polls evaporated and he lost to Governor Bill Clinton. These examples are not unusual. Economic conditions tend to have an outsize impact on voter sentiment, a fact not lost on Clinton’s campaign strategists who urged the Arkansas governor to focus on domestic “kitchen table” issues rather than geopolitics. National polls generally receive a great deal of media attention, but their utility value in the initial stages of a general election is limited.

Investment implications

Market performance in election years

Investors are often anxious to know whether a specific election result will have a significant impact on portfolio performance. As we have discussed in prior reports, fiscal and regulatory policies can affect the performance of specific asset classes in the short run and should be monitored. However, longer-term portfolio management decisions should be treated as an apolitical exercise.10 Political biases can have a counterproductive impact on longer-term investment performance by encouraging risk-averse behavior at precisely the moment when securities are undervalued and market opportunities are attractive.

Equally important, only two dozen presidential elections have been held since 1928, so there simply are too few data points to draw a statistically defensible conclusion regarding the political impact of one party or another on market behavior. Moreover, the data referenced by pundits often rely on calendar-year performance. This can be misleading because the incumbent executive occupied the presidency for the entire calendar year in which the election occurred. While the result of any election might have a temporary impact on equity market sentiment, a credible argument can be made that the incumbent president bears as much responsibility, or more, as the newly elected individual for market performance when a change of administration occurs. In Fig. 3, we show calendar-year returns for the S&P 500 in each election year since 1928. Contentious election campaigns do not, in and of themselves, trigger an equity market correction.

If one excludes the 2008 presidential election, which occurred during an unprecedented global financial crisis, the performance of the S&P 500 in election years was roughly similar regardless of which party was elected to the presidency (Fig. 4).

Policy issues

Policies expected to receive the most attention

The two presumptive presidential candidates are very familiar to the US electorate, and their policy platforms are markedly different. President Biden is expected to emphasize the implications of climate change and disparities in wealth and income. He will likely focus as much attention as possible on abortion rights to encourage higher turnout among registered Democrats and unaffiliated voters. Former President Trump is expected to emphasize the adverse impact of inflation on American households and the national security threat posed by a porous southern border. He will likely also focus attention on the need to execute new trade agreements under a threat of broadly imposed tariffs.

In Fig. 5 below, we review some of the salient policy issues expected to receive the most attention in Congress. The expiration of a wide range of personal tax provisions, ranging from higher estate tax exemptions to limitations on state and local tax deductions, will be addressed by Congress in 2025. The outcome of the election will affect how those provisions are handled.

Fig. 5: Potential impact of the election on sectors, fiscal policy, and geopolitics

Sectors

Industrials

Thus far, a bipartisan compromise on defense funding and foreign aid has proven elusive. We believe a compromise will be reached by the end of March that will provide for higher spending in the next fiscal year. Both candidates are expected to support aid for Israel, but more stringent conditions may be attached to future aid. Military assistance for Ukraine has become a more contentious issue, and a Trump administration would be more likely to encourage a negotiated settlement to the conflict.

Energy

The two candidates are expected to highlight their alternative approaches to energy policy. A Trump administration would be expected to advocate forcefully for a reduction in expenditures related to the Inflation Reduction Act (IRA). A unified government under GOP control would be necessary for this to occur and might still encounter opposition. A Trump administration would likely remove barriers to fossil fuel development. The key issue to watch during 2024 will be oil prices due to a potentially broader conflict in the Middle East. 

Financials

The outcome of the election will affect regulatory policy, but Congress is set to encounter difficulty passing substantive legislation regardless of who is elected president. We would expect a Biden administration to impose more stringent rules and interpret regulations that increase the cost of compliance for banks. A Trump administration would be more likely to support some deregulation and tailoring of existing rules and regulations that could simplify the oversight of banks and lower compliance costs. 

Healthcare

Healthcare policy will likely have a lower profile in this election. We expect President Biden to claim credit for authorizing Medicare to negotiate some pharmaceutical prices. However, we do not expect additional drug pricing proposals to gain much traction in a closely divided Congress. Republicans are unlikely to sponsor major healthcare policy initiatives and appear to have little appetite to roll back the IRA’s drug pricing provisions, but will likely focus attention on rising healthcare costs.

Municipals

As the next Congress reconvenes in January 2025, both parties will be focused on passing a major tax bill. We expect all federal tax expenditures—including municipal tax exemption—to be actively debated, but substantive changes to tax exemption appear unlikely. Public interest groups are advocating for a change to the Internal Revenue Code that would permit advance refundings. We believe this is unlikely in a Republican scenario but remains a possibility in a Democratic sweep or a divided government.

Real estate

Section 1031 now applies only to exchanges of real property. Exchanges of personal or intangible property are no longer exempt from treatment as a gain or loss under the Internal Revenue Code. We place a low probability on the restoration of personal or intangible property as eligible exchanges for 1031 treatment. Previous Democratic administrations have discussed further limitations on 1031 exchanges, but the probability of substantive restriction in a closely divided Congress is low. 

Technology and communication services

Technology policy has been front and center in both domestic policy and international relations for the past five years. The four pivotal issues for the two presidential candidates are: 1) the perception of disproportionate market power of large technology companies; 2) the impact of mergers and acquisitions by large technology companies on competitive practices; 3) bilateral relations with China; and 4) the risks, threats, and opportunities of artificial intelligence. Of these, the campaign will probably focus most intensely on the third.

Fiscal policy

Federal deficit

Management of the growing federal deficit is now top of mind for many members of Congress. Republicans are likely to focus on reductions to domestic policy programs, while Democrats will likely focus on raising new revenue to support existing programs. A unified government under either party would result in policies aligned with those priorities. A divided government would result in only incremental changes that might slow the rate of growth but not reverse the size of the deficit.

Personal tax provisions

Congress will address a variety of expiring personal tax provisions after the election. We believe an increase in the limitation to the state and local tax deduction is probable, but a return to an unlimited deduction is more problematic because it would result in foregone revenue to the federal government, thereby raising the deficit. The top marginal tax rate is scheduled to revert to 39.6% in 2026. A unified Democratic government will likely target lower income levels for relief. A unified government under GOP control would seek to make the existing rates permanent.

Estate tax provisions

The federal estate tax exemption will be cut in half in 2026, adjusted for inflation, due to the sunset provision in the Tax Cuts and Jobs Act. We expect a spirited debate over whether to adjust the exemption higher, but the outcome will depend on the election results.

Geopolitics

Immigration and border protection

Immigration and border protection has become a contentious campaign issue. Republican candidates are likely to focus on the threat to national security from a porous border. Democrats will likely focus on the GOP’s unwillingness to strike a legislative compromise. At present, it is unclear whether a legislative compromise will be reached prior to the election.

Foreign aid

A negotiated outcome that allows the US to resume military assistance to Ukraine and Israel is proving more elusive than expected, but we still anticipate a compromise over increased military aid, subject to some conditions. 

International trade

Global trade relationships will be front and center in the next administration. A second Biden administration will likely pursue the “high fence, small yard” policy, whereby the most advanced technology is highly restricted, but trade in less sensitive consumer items is less affected. A Trump administration is more likely to implement trade restrictions and impose broad tariffs on national security grounds to leverage concessions from global trading partners.

Endnotes

1We are obliged to note that there are occasional noteworthy exceptions to the growing reluctance to split tickets. For example, Senator Susan Collins (R-ME) retained her seat in the US Senate in November 2020 despite the fact that President Biden won the popular vote in Maine by 9 points over former President Trump.

2Pew Research Center, “As Partisan Hostility Grown, Sings of Frustration with the Two Party System,” 9 August 2022.

3David C. Kimball, “A Decline in Ticket Splitting and The Increasing Salience of Party Labels,” University of Missouri, 2002. See also Shiro Kuriwaki, “Is Ticket Splitting More Prevalent in State and Local Races?” MIT Election Lab, July 2019. Kuriwaki argues that the instances of ticket splitting remains more common in state and local races.

4Stef Kight, “Charted: Split-ticket districts are disappearing,” Axios, 6 July 2022, based on data provided by Pew Research Center and the University of Virginia. 

5Drew DeSilver, Pew Research Center, 8 December 2022.

6Jarret Renshaw, “Biden, Trump unpopularity buoys third party hopes for 2024 US election,” 17 November 2023.

7The six states that will be contested most actively are Georgia, Arizona, Wisconsin, Michigan, Nevada, and Pennsylvania. One or two others may be in play as the general election campaign gets underway.

8UBS Chief Investment Office, ElectionWatch 2024, “Early expectations,” 4 October 2023.

9Michael D. Cohen, “Presidential Races Can Change Significantly as Election Day Approaches,” Gallup, 26 October 2000.

10UBS Chief Investment Office, ElectionWatch 2024, “Early expectations,” 4 October 2023.