The answer to the question of whether or not there is a so-called “Wall Street effect” of equity market performance on the electoral chances of incumbent House candidates has substantively important repercussions on various levels. Existing research studies have identified statistically significant effects of macroeconomic indicators like unemployment, real GDP growth, and inflation on electoral incumbency rates. In particular, these models reveal a strong positive effect between out-party incumbency and recessionary indicators. What these models fail to take into account, I hypothesize, is that voters may use recent stock market performance as a proxy measure for current economic health, on average, even after controlling for state- and national-level macroeconomic and political conditions. If true, this could alter their voting behavior based on how well or poorly the stock market did during various periods during the current election cycle.
The reason this question is important is that if we assume that incumbents are self-interested with respect to their own reelections, being able to identify effects resulting from stock market performance could lead to perverse incentives by lawmakers to affect securities markets. Out-party members might be encouraged to promote policies that weaken markets at the expense of shareholders in order to damage in-party member electoral changes. Conversely, policies that favor short-term market gains such as preferential tax treatments for securities transactions or relaxed regulatory structures might be sought by in-party members to bolster their reelection changes. This could create bubbles and damage the structural long-term health of markets, which could have negative effects even beyond shareholders. In sum, this effect, if it exists, could institutionalize rent-seeking behavior for a small group of powerful politicians instead of the pursuit of policies beneficial to stockholders, companies, and voters.
There is evidence of such behaviors; political economists have asserted that macroeconomic policy behavior routinely changes in election years. From a political strategy perspective, it stands to reason that campaign advisors both on Capitol Hill and in the White House would want to know how to frame the debate with respect to markets in election years—if these effects are shown to exist, future congresses and presidents might reassess their own election tactics in light of available information.
The results of my econometric models have identified statistically significant effects of market performance on incumbent vote share. Specifically, positive shorter-term market performance appears to be beneficial to incumbent House candidates, whereas the effects of longer-term performance depend on whether the incumbent candidate is a Democrat or a Republican. I think a case can be made that as voters pay more attention in the months leading up to an election, at least some part of stock market performance creeps into their voting decisions in aggregate and incumbents appear to benefit from short-term positive market gains. Longer-term market performance effects seem to reinforce the idea that many voters buy the commonly held idea that Republicans are more equipped to handle the economy and financial markets than are Democrats. What is less clear is whether voters are using stock market performance as a proxy for current or predicted economic health or for some other combination of reasons. Without respondent-level data, it may be impossible to identify and isolate voter motivations in that way.
It is probably not likely that legislators will change any of their policy behaviors based on these results—effects of markets on voter preferences is relatively uncharted territory. As this research area develops, it will be interesting to see is whether policies affecting the securities markets change during election years and in what ways.
I look forward to presenting my data and results at the conference.