Although all election years feel different, 2020 no doubt may be one of the most unique election years ever. We have a pandemic, a deep recession, extremely heightened partisanship, a mail-in ballot controversy, an unpredictable president, and the oldest presidential candidate ever.
Amazingly, 1940 was the last time the S&P 500 was lower during an election year with an incumbent in the White House. Historically, when a president has been up for reelection, it has tended to boost stocks. Stocks were down big in 2008—but President George W. Bush had finished his two terms. It isn’t about Republican or Democrat—it’s about trying to boost the economy and stock prices by the time voters go to the polls. Some good news on the economy in the coming months, or progress toward a vaccine, could potentially get the S&P 500 all the way back to positive territory for the year, after being down 30% year to date in March, and that would possibly help President Donald Trump’s re-election chances.
We’re often asked if stocks perform better under a Republican or Democratic president. We’d take a different angle and point out that stocks have tended to do their best when we have a split Congress.
"Markets tend to like checks and balances to make sure one party doesn’t have too much sway."
When Republicans have controlled both chambers in Washington, DC, on average the S&P 500 has gained 13.4% per year and GDP has grown 3%. When Democrats have controlled both the House of Representatives and the Senate, the economy did a little better, with GDP growth of 3.3%, while the S&P 500 was up 10.7% on average. When we’ve had a split Congress, however, the average S&P 500 gain climbed to 17.2%, while GDP growth averaged 2.8%, again suggesting markets may prefer split power come November.
History shows that the US economy has major bearings on the presidential election outcomes. If there has been a recession during the year or two before the election, the incumbent president has tended to lose. If there were no recession during that time, the incumbent tended to win. In fact, the economy has incredibly predicted the winning president every year going back to President Calvin Coolidge, when he won despite a recession within two years of the election. But Coolidge inherited a recession when President Warren G. Harding passed away, and by the time people voted in November 1924, the Roaring ‘20s had started to take hold and the economy was strong again.
Our analysis suggests the 2020 presidential race is still up in the air. If the economy continues to open up, a vaccine is on the way, and the massive stimulus continues to drive asset prices higher, President Trump’s chances may improve. A weak economy struggling to come out of recession and weaker markets would likely favor challenger former Vice President Joe Biden.
How stocks perform the three months ahead of the election has delivered a solid track record of deciding who will be in the White House the next January. The S&P 500 has predicted every presidential election winner since 1984, and 87% of the winners since 1928, with stocks favoring the incumbent party if stocks are higher in the three-month period before the election. As the chart shows, if stocks sell off ahead of the election, the opposition party has tended to win and the incumbent party has lost.
Potential policy changes
Markets tend to be volatile ahead of elections because of the uncertainty around possible policy changes. In this election, the stakes are particularly high for corporate America because a potential takeover of the Senate by Democrats and a possible Biden victory reportedly may lead to an increase in the corporate tax rate from 21% to 28% and unwind the corporate earnings boost the 2017 Tax Cut and Jobs Act delivered. Other areas to watch that could impact markets:
- Financial regulation could tighten and potentially impact markets.
- Healthcare should perform well regardless of the election outcome with “Medicare for All” off the table. Pressure to reduce drug prices is bipartisan.
- Energy could be hurt by a potential Democratic sweep, but prices may get support from lower production and higher production costs. Green energy may be a priority.