Redistricting Entrenches Gridlock

Editors’ note: MarketMinder is nonpartisan. In our view, political bias blinds and leads to investing errors. As such, we never favor any party or politician. Our political analysis aims solely to assess developments’ potential market impact.

Thursday, the Census Bureau released its delayed, once-per-decade congressional redistricting data, sending political wonks scrambling to crunch the numbers, redraw House electoral maps and assess what it all means for next year’s midterm elections. For investors, we think the takeaway is more high level: The redistricting process likely adds to the political gridlock stocks enjoy in the here and now.

April’s state-level Census data reapportioned House seats among states for the next 10 years, but the granular, local data for them to draw new districts still weren’t available. As with most things lately, COVID delayed collection, analysis and publication of the data originally due in March. Hence, for the past four months, states knew if they would gain and lose seats, but not which districts would change, as that depends on population changes at the city and county levels. For example, California is one of a handful of blue states losing a seat. But without the data on local population changes, it was impossible to know whether the vanishing seat would leave a Republican or Democratic incumbent out in the cold. The long process of parsing this granular data to determine the final district boundaries can now begin.

That process varies by state—and, specifically, whether a partisan legislature or independent commission draws the map. In this cycle, Republican-controlled states will be able to redraw 187 congressional districts while Democratic states will redraw 75, with 167 more under split control or independent commission (leaving 6 districts that are statewide, i.e., not needing new maps).^[i] For states without nonpartisan redistricting commissions, politicians typically redraw electoral constituencies’ boundaries to favor their party—a practice called gerrymandering. Yet this is subject to a litany of limitations, including court challenges. There are also other nuances. States leaning Republican may have seen an influx over the last decade, but they tended toward metropolitan areas, which have historically trended Democratic. Migrants’ political leanings are another wildcard. So while on paper this process likely favors Republicans in 2022’s midterms, we wouldn’t overrate it.

With that said, Democrats do have an uphill battle to keep the House next November. The chamber is currently split 220 – 212 (with 3 vacancies), the party’s slimmest majority while a Democratic president was in office since Grover Cleveland over 100 years ago. It wouldn’t take many redistricting changes to flip the chamber. Plus, the president’s party usually loses ground in midterms.

As always, we don’t think either party’s controlling Congress is inherently good or bad for stocks. But redistricting overall likely helps markets by compounding the present gridlock. Legislative uncertainty is often a headwind for markets. While much of the focus is on potentially big changes to property rights and regulations, even less outwardly transformative bills can create winners and losers—and unintended economic consequences. Gridlock helps mitigate this. Congressional wrangling can water down contentious provisions and slow the process down—if not grind it to a halt—sapping surprises in store for stocks. The prospect of redistricting aids this. We think House members at risk of having their constituencies erased or redrawn in a way that shifts the electorate’s partisan leanings have ample incentive to moderate. A representative in this situation probably doesn’t want to rock the boat, but tack to the middle and court the broadest possible swath of voters (not to mention avoid alienating opposition state lawmakers potentially drawing the map).

There are some signs this force is already setting in. On Thursday, nine centrist House Democrats—all potentially subject to redistricting—signed a letter to House Speaker Nancy Pelosi saying they won’t consider the Biden administration’s $3.5 trillion spending bill until the House approves the bipartisan infrastructure bill the Senate passed Tuesday. This goes against Pelosi’s legislative strategy of pairing the two bills to keep House Democrats’ progressive caucus on board, since they refuse to support the infrastructure bill without agreement on the bigger budget package. Pelosi needs both groups to pass either. So it now appears they are at an impasse. Whether and how this resolves is anyone’s guess, but the longer it takes, the more compromise is likely, watering down legislation and uncertainty for stocks.

Redistricting’s getting underway also offers more clarity on the House races taking shape. As states draw their congressional maps, markets can better assign probabilities to the chamber’s likely makeup—and overall government control—after midterms. Falling political uncertainty in this way provides a further tailwind for stocks, in our view.