How Contested Conventions Will Affect Summer Market Volatility

March 22, 2016

by Seaborn Hall

Some claim that Donald Trump will not get the nomination, others believe he will easily; some of the analysis is erroneous when it gives Trump a clear path to the nomination. Depending who you ask, Hillary Clinton will be indicted, mired in scandal or not by the end of May. The uncertainty of contested conventions will contribute to summer market volatility. Let’s look at the delegate math and the most likely scenarios.

Party conventions are no longer controlled by old men sitting in smoke-filled rooms and are more accurately called contested or open conventions rather than brokered conventions. This is partially because a voting process of elected and/or appointed delegates controls the results of the convention and has since the late 1930s. Despite this, some “brokered” conventions survived into the late 1960s. This was due to the fact that state elections did not always produce bound delegates up until that time. That said, the political and donor class on both sides still impact the results through the election and appointment of delegates, which happens pre-convention at the state and party levels, and through the influence of delegates, which occurs throughout the process.

The Democratic convention of 1952 was the last contested convention that required more than one round of voting to elect a nominee. Adlai Stevenson was nominated on the third ballot and eventually lost the general election to Republican Dwight D. Eisenhower.

The last contested convention that produced a president was in Chicago in 1932 when Franklin Roosevelt went on to win the presidency. Roosevelt won the nomination on the fourth ballot when John N. Garner of Texas pushed delegates his way in return for the vice presidency. Deal making is a staple of these type of conventions. The stock markets were barely affected – they bottomed that year due to the Depression and rose into 1937, when they experienced another major correction.

The last Republican convention that produced a president was also in Chicago in 1920 when William G. Harding was nominated on the tenth ballot. The leading candidate could not attain a majority of delegates on earlier ballots. Harding, a compromise candidate resulting from another deal, was the first sitting senator to be elected president. The markets were relatively stable that year, but they began to rise in 1921 and took off in 1924-25 after Harding died in office from a cerebral hemorrhage in 1923.

Contested conventions versus a clear path

Republican convention rules require that a candidate have a majority of 1,237 delegates to attain the nomination, not a mere plurality. According to Real Clear Politics, Trump’s national polling average is currently about 37%, and even with his win in Florida, he will still need at least 50% of the remaining delegates to get to 1,237. But, his average delegate share in primaries up to March 15th was only about 42%. After March 15th, it was slightly higher. But, almost two-thirds of the popular vote is still against Trump in his own party.

Cruz would need about 70% of the remaining delegates to win the nomination. This means there is a good probability of a contested Republican convention when it arrives July 18-21 in Cleveland, Ohio.

If Hillary Clinton is called to testify before a grand jury in May, indicted, or if she is not indicted but a scandal results from FBI leaks concerning her email violations, it may be difficult for her to continue her campaign. Of course, the Clintons have shown they have political endurance, so nothing is certain. But, there is a possibility that there will be an open Democratic convention July 25-28 in Philadelphia.

With Clinton’s perceived honesty already below 40% in some polls, Republicans and some Independents may be excited about the prospect of a Republican president. But, such a result is far from certain in the midst of a fractured candidate-selection process with the potential of splitting the party during a contested Republican convention. With many in the party against him, Donald Trump is not assured the nomination.

As of late March 19th, with some delegates to still be apportioned, Trump had 678 delegates; Ted Cruz 423; Marco Rubio 164; and John Kasich 143. Based on this count, Trump needs 559 delegates to win. If the other candidates have 1,237 delegates combined, they can prevent Trump from claiming the nomination.

By the time of the Democratic Convention, a majority of 2,382 delegates will be needed to win the nomination. As of March 19th, Hillary Clinton had 1,614, and Bernie Sanders, 856 (figures include super-delegates). Because the remaining states heavily favor Clinton, and because she has an advantage with super-delegates, barring a scandal that derails her, she is assured the nomination.

Super–delegates versus unbound delegates

On the Democratic side, there are 712 independent super-delegates. According to Real Clear, 467 are presently committed to Clinton; 26 to Sanders. These super-delegates are un-pledged delegates, a class created in 1984 to give present and former party officials and former leaders an influential voice in the nomination process.

On the Republican side, reports vary, but according to some, there are somewhere between 20-30% of delegates that are unbound, meaning that they are free to cast their votes independently – some on the first vote, some after. According to at least one report, initial unbound delegates only number about 160 or so, and are unbound at the state or party level from the beginning. But, some of the extra unbound delegates come from candidates that have suspended their campaigns.

For Republican’s, each state’s rules on voting bound or unbound are different and arcane. This is why it is difficult to determine the exact number of unbound delegates on the first vote on the Republican side. For example, though Marc Rubio suspended his campaign after Super Tuesday II, there are some unbound delegates he does not retain, but he retains his bound candidates, which will likely go to Cruz.

In general, the advantage of a candidate who stays in the race until the convention is that their delegates remain with them and continue to be bound during the first convention vote. If you can block the leader’s route to victory and keep him or her from attaining the needed delegates to win, this is king -making power. What confuses the process on both sides is each state’s varied and opaque rules relative to their delegates. And the conventions and parties can apparently change their rules right up until the week before the conventions begin.

But, different from the Democratic Party, the Republican delegates are not super-delegates, meaning that most of them are not established party officials with ties to a main candidate. They are unbound delegates from different states that do not have one loyalty, but in most cases many different loyalties. And in some cases, candidates with suspended campaigns have aligned themselves with remaining candidates, like Ben Carson with Donald Trump and Carly Fiorina with Ted Cruz. This makes it likely that the former delegates would vote for the newly endorsed candidate, not the favored candidate or the candidate with a plurality.

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