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An Opaque Glimpse at the Next Four Years - November 16, 2020

The post-election environment has created clarity but also raises new questions. One question that usually arises: How might a new president affect stock market performance?

Like or dislike President Trump, we have a track record regarding policies and style. Stumping on the campaign trail, Joe Biden offered us a preview, but questions remain.

We may gain some insights by reviewing prior market performance, but it won’t answer all our questions. For starters (stating the obvious), no one knows the future.

That said, let’s jump in. Figure 1 breaks down average annual S&P 500 performance over the last 70 years by Congressional makeup and the party that holds the White House.

Based on current projections, Democrat Joe Biden will be the next president, the Democrats will control the House, and it appears the Republicans will control the Senate. Two runoffs in Georgia will determine Senate control.

Under the most likely scenario, the S&P 500 has averaged an annual increase of 15.9% each year. Historically, performance has been strong when control of Congress has been divided.

Let’s take it one more step. Using the historical data, market performance was subdued during the first two years of a new president before turning higher in years three and four.

Figures 1 and 2 are fine for casual conversation, but they are not hard and fast rules. The economic environment has historically had the greatest influence over markets.

What do the data tell us? One should be leery about running investment decisions through a political filter. Stocks usually rise no matter who is president, and stocks have a long-term upward bias. But let’s not forget that shorter-term performance can be erratic.

A thumbnail sketch

Investors are sifting through four major policy initiatives that have been promoted by Biden. Each could have some influence over stocks.

  1. A very large but costly stimulus bill – viewed positively
  2. Stability in trade policy – viewed positively
  3. A big hike in the corporate tax rate – viewed negatively
  4. Stiffer regulations for businesses – viewed negatively

A divided Congress sharply reduces odds of a big stimulus bill. Both sides agree that additional funds would aid the economy but remain far apart on the details. And Biden is less likely to rock the boat on trade.

A Republican Senate would look unfavorably on a big hike in the corporate tax rate. Such an increase would hurt corporate earnings.

A Republican Senate would be less likely to go along with new regulations, but Biden could use his executive powers to introduce tighter regulations in smaller doses.

The early read, investors have warmed to the idea of divided government, which would be a surprise outcome based on pre-election polls. But let’s not forget that the economic environment will likely have the biggest sway over market performance.

Shorter term, investors are also grappling with soaring new Covid cases. Yet, Pfizer’s (PFE $39) announcement last week that it has developed a new vaccine aided short-term sentiment. A safe and effective vaccine that’s readily available could go a long way in restoring confidence.

@LWMLLC