How will the stock market react if Democrats win the White House and Senate? Here’s what history suggests.
Russ Wiles Arizona Republic
Stock market investors in general don’t seem all that concerned about the possibility of Joe Biden winning the White House in November. Stock prices have marched relentlessly higher in recent months, even as the former vice president maintains a lead over President Donald Trump in the polls.
But investors might want to think hard about the ramifications of a single-party sweep as the election approaches. They also might want to delve deeper into Biden’s proposed tax agenda and possible impact on various industries.
Democratic presidents often are assumed to be less friendly to business and thus not favorable to stock prices. But in reality, stocks typically fare a bit better under Democrats than Republicans, various studies have found, although the results depend on how many elections you analyze.
Jurrien Timmer, a director in Fidelity’s global asset-allocation division, found that stocks did better early in a Republican presidency compared with a Democratic administration in his historical study. But over full four-year terms, the results were basically a dead heat, Timmer wrote in the report.
Congressional makeup important
Maybe the bigger question is what happens to Congress. Currently, Democrats appear likely to retain control of the House this fall, with the Senate up for grabs.
“Stocks have tended to do their best when we have a split Congress,” wrote Ryan Detrick, senior market strategist at LPL Financial. “Markets tend to like checks and balances to make sure one party doesn’t have too much sway.”
Since 1950, the Standard & Poor’s 500 index has returned an average 17.2% annually during years of split Congresses, according to LPL Financial. That compares with 13.4% on average when Republicans control both the House and Senate and 10.7% when Democrats are in charge. Timmer found that a Democratic president and divided Congress represents the best outcome for investors, based on the historical record.
Incidentally, the stock market tends to fare worse in the year or two after an election than during the two years preceding an election – a result on which the various studies tend to agree.
In the first year after an election, large stocks have returned about 7.9%, according to Timmer’s report, rising successively to a 9.1% average gain in the fourth years, which also happen to be election years.