The 'Wall Street' effect on incumbent vote share in the U.S. House of Representatives, 1982--2008

Much research has been done regarding the effects of macroeconomic conditions on the electoral chances of congressional candidates—incumbents, in particular—with mixed results. However, most of the models tend to ignore potential effects of equity market performance on congressional elections. My hypothesis proposes that positive equity market performance in a current election cycle predicts a positive effect on incumbent electoral vote shares, even after controlling for state- and national-level macroeconomic effects and the political environment. I specify and test a principal component fixed effects regression model with continuous variables measuring incumbent vote share in elections to the U.S. House of Representatives and the performance of the S&P 500 stock index over variable time periods in order to isolate a "Wall Street effect." This model is used to test whether there is a statistically significant effect of US equity market performance on incumbent candidate vote share. I find that short-term positive stock market performance predicts an increased vote share for incumbent congresspersons, on average, controlling for economic and political factors. Positive long-term market performance, on the other hand, appears to reward only Democratic House incumbents using the same controls. Republican House incumbents benefit from negative long-term stock market performance, indicating voters may take conventional wisdom regarding party differences with respect to business and regulatory policies into account when making voting decisions.