The Hard-Coding of the US Electorate…and What It Means for Markets

Rick Brink

There’s a long-standing viewpoint among investors that US elections don’t really matter to markets. But we would argue that today’s election results do matter. We examined this topic from multiple dimensions, as well as the implications for investors, in our recent AB Disruptor Series webcast, “2024 US Election Outlook: Politics Don’t Matter?

Prefer to watch? For the full webcast replay, click here.

Over the long arc of history, market returns have been strong no matter which party wrests control of the White House. Since 1937, the average annualized price return for the Dow Jones Industrial Average has been 7.0% under Democratic presidents and 6.7% under Republicans. So, staying invested would have been a sound plan for portfolios.

Under divided governments, with their inherent gridlock and inertia, returns have been higher than under unified governments (8.1% versus 5.1%). Indeed, we think the biggest mistake investors could have made would have been to believe that the party winning the presidency mattered—and to invest with that in mind. Republican or Democrat, the results of that strategy have fallen far short of simply staying invested.

The “Clean Slate” Presidential Election Era

The story of how election results have become more meaningful has its economic origins around 1980. The ensuing decades would bless investors with a historic bull market. A super-cocktail of factors drove the rally: globalization, automation, falling rates and inflation, and favorable demographics.

The numbers were impressive. From 1981 to 1999, the S&P 500 averaged over 18% a year. Bond returns, fueled by a massive tailwind of falling rates, were also very strong. All told, many investors enjoyed, by a wide margin, two of the longest bull markets in American history—separated by Black Monday in 1987. Excluding that event, it can be argued that the entire period marked the single longest bull market. And the economy hummed, with only one mild recession in the early 1990s.

During that time, the US electoral map resembled a wide-open slate for both Republican and Democratic presidential candidates, with many states‘ electoral votes in play. At the extreme, Ronald Reagan won reelection in 1984 by essentially sweeping the entire map (Display). His only narrow loss was in Minnesota, the home state of his opponent, Walter Mondale.

The largely open map was illustrated by the 1988 and 1992 elections, which produced sizable margins for each party. In 1988, Republican George Bush roundly defeated Democrat Michael Dukakis. Four years later, Democrat Bill Clinton flipped the map blue. Bush’s 1988 winning margin was over 300 electoral votes; Clinton’s was over 200. That’s a combined margin flip of 500 electoral votes in two straight elections.

One reason for the lopsided results: for much of that period, most voters felt their votes didn’t matter, viewing the candidates as very similar. And ideological overlap was sizable. For example, according to the Pew Research Center, about a third of Republican voters in 1994 held more liberal views than the median Democrat; roughly the same share of Democrats were more conservative than the median Republican.

Super-Cocktail By-Products: Increasing Polarization

However, the seeds of polarization had been germinating under the surface for many years, leading to a growing hard-coding of the electoral map. Much of this was a by-product of the super-cocktail: growing income inequality, increasing distortions based on educational levels, offshoring of manufacturing jobs and a sharp decline in union power.

Having entered the millennium with equity markets at all-time-high valuations, the US experienced a marked downshift in economic growth in the 2000s, along with the twin crises of the bursting of the tech bubble and the global financial crisis. The resulting market declines and recessions, alongside rescue packages, exacerbated the growing electoral polarization.

The Electoral Map Becomes Increasingly Hard-Coded

As these shifts in attitudes happened, they led to an increasing “hard-coding” of a large swath of the US electoral map, with a growing number of states consistently voting for one party, whether red or blue. This culminated with the Bush-Gore 2000 election and Bush-Kerry election in 2004. Both contests were very close, capping off 20 years of electoral hard-coding. Since the 2000 election, roughly two-thirds of US state electoral votes have consistently gone to the same party (Display).

Meanwhile, the gap between Democratic and Republican party perceptions has continued to grow. As per the Pew Research Center, the percentage of party members viewing the other party unfavorably in 1994 was in the teens; by 2017, it was nearly 50%, and is higher still today.

What Does Political Polarization Mean for Markets?

In the end, we believe election results do matter today. Greater political polarization means increasingly polarized political agendas and policies, which in turn mean more polarized market winners and losers. But we don’t believe that market timing is the way to play elections—it’s about overlaying the effects of policy decisions onto different economic sectors, industries, companies and—ultimately—portfolios.

We’ll dig deeper into the potential implications of the changing electorate and upcoming US election on markets and industries ranging from healthcare to energy in our upcoming Disruptor Series webcast on September 30.

AB’s Disruptor Series is designed to provide distinctive perspectives on critical issues facing the capital markets today. See more from the series from previous editions to podcasts here.

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The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.