Implications of a potential rematch
ElectionWatch 2024
All politics is national
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
Looking ahead to November
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 |
Nine months is a long time in politics
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.
Market performance in election years
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).
Policies expected to receive the most attention
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
Fiscal policy
Geopolitics
Endnotes
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.