March May Matter More for Investors Watching U.S. Primaries

We think investors should not extrapolate too much from who wins the early contests, including Iowa.

Even though the Iowa caucuses on 3 February account for only 1% of the total delegates at stake in the U.S. Democratic primary elections, they nevertheless seem to capture the imagination in every presidential election cycle. Not only is Iowa the first contest, but more importantly, every Democratic candidate who has won the Iowa caucuses since 2000 has gone on to win the Democratic nomination (although it should be noted that the last three winners in Iowa on the Republican side have not become the nominee).

However, the Democratic nominating cycle faces a unique confluence of dynamics this year. For one, many bigger states with larger delegate counts will hold their primaries earlier than usual. As a result, the outcome in Iowa (and New Hampshire next week) could matter less than it has historically, and a frontrunner may not emerge for some time, extending the nomination process closer to the Democratic convention in July. There is also a higher chance of a brokered convention than in any cycle in recent history.

Prolonged cycle possible

In the Democratic U.S. primaries, winning a party’s nomination is just math: The candidate who wins 50% of the delegates – or 1,990 delegates – secures the nomination at the party’s convention. This year, because the dynamics are different, it may take longer than usual for one candidate to reach that goal.

Many bigger states, including California and Texas, have moved their primaries up to Super Tuesday on 3 March. In the past, these states held their contests as late as June and at that point, their results simply validated the nominee. With bigger states voting earlier this year, the momentum could shift considerably from a delegate perspective, regardless of who may have won the Iowa or New Hampshire contests. In fact, former New York City Mayor Michael Bloomberg, after skipping the first four primaries, will only begin competing in these larger contests.  

In addition, the race remains crowded, and delegates in those large states are therefore likely to be spread across a greater number of candidates than they would have been later in the cycle when the field has usually winnowed. Because delegates from each state are allocated proportionally (vs. winner-take-all) and super delegates (who are free to support any candidate) are now on the sidelines until the convention, unlike previous cycles, it may take longer for one candidate to emerge as a clear frontrunner in the race for delegates, increasing the chances for a protracted primary cycle.

In turn, this would also raise the chance of a brokered convention, in which no candidate secures the required 50% of delegates before the convention. A brokered convention is essentially a “jump-ball” dynamic: Any candidate can theoretically win the nomination. (This would be very dramatic and has not happened since 1952.)

What does it mean for investors?

In the context of a possibly longer primary cycle, Iowa’s caucuses and the next three primaries will matter (New Hampshire on 11 Feb., Nevada on 22 Feb., and South Carolina on 29 Feb.) to the extent that candidates outperform or underperform expectations. But we think investors should not extrapolate too much from who wins the early contests. 

In fact, the most important dates for investors are 3 March, when 34% of all delegates will be allocated across 15 primaries, and 17 March, at which point nearly 65% of delegates will have been allocated cumulatively. If one or two clear frontrunners do not emerge by mid-March, we think the chances of a brokered convention increase significantly. 

Over the next few weeks, the financial markets may react to the early primary results, but we think it is important for investors not to get sidetracked by any primary-related volatility. The 2020 Democratic nominating contest could last longer than previous primary cycles – and the ultimate outcome could look quite different from the results in the early contests. 

Libby Cantrill is PIMCO’s head of public policy and a regular contributor to the PIMCO Blog.

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