The results from the Iowa caucuses are in, and even though the state represents a mere 1% of total delegates for the respective Republican and Democratic U.S. presidential nomination contests, Iowa is important as the first test for candidates on both sides.
What did we learn last night, and more importantly, what are the key takeaways for investors?
On the Republican side, Senator Ted Cruz (R-TX) won the caucuses with 28% of the vote compared to 24% for Donald Trump and 23% for Senator Marco Rubio (R-FL). There are a few items to note:
- Cruz’s win is not entirely surprising given his strong ground game (he visited all 99 precincts in Iowa), his support among evangelical Christians, and Iowa’s recent record of selecting the more conservative candidate (Mike Huckabee in 2008 and Rick Santorum in 2012);
- Donald Trump failed to turn his strong polling into enough votes to win the caucuses; this could spell trouble for Trump’s campaign, which is predicated on galvanizing the historically disenfranchised cohort of Republicans; and
- Marco Rubio, with his stronger-than-expected showing (losing to Trump by only 1%) took a big step in terms of positioning himself to be the so-called establishment candidate, especially if he continues his momentum into the New Hampshire primary (9 February).
On the Democratic side, Hillary Clinton only very narrowly defeated Senator Bernie Sanders (I-VT) by 49.9% to 49.5%. While these results were closer than some expected – and Sanders is likely to win his neighboring state of New Hampshire next week — Hillary Clinton nevertheless remains the frontrunner, given her support among non-white voters (who make up 44% of the party) and her leg up among so-called super delegates, who account for almost 20% of the total delegates at stake in the Democratic contest.
For investors, the key takeaway is that the nomination process for both parties will likely be a marathon, rather than a coronation. We won’t likely know who the ultimate nominee will be until late spring – and possibly summer. The Republican process could easily produce a Cruz or Trump lead early on, given that the calendar is frontloaded with more conservative states (which are required to apportion delegates on a proportional basis) only to give way to contests in bluer states, which largely allocate delegates on a winner-take-all or winner-take-most basis. This could result in a two-way contest (Cruz vs. Rubio) or even three-way contest (Cruz vs. Trump vs. Rubio) until late April or May – or to the convention in July (although that remains unlikely). On the Democratic side, because states in all forthcoming contests allocate delegates on a proportional basis, it may take the ultimate nominee until late spring to get a majority of delegates.
Bottom line? The primary election cycle has truly just begun, and with a quick outcome unlikely, uncertainty around the U.S. elections could be one more source of volatility for markets over the coming months.