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Parsing the Policies

Parsing the Policies – What if One Party Sweeps the Election?
Oct 15, 2020

During the first two years of President Trump’s current term, he enjoyed Republican control of both the House and the Senate (during which time he passed the Tax Cuts and Jobs Act).  President Obama benefitted from Democratic control of Congress for the first two years of his first term (when the Affordable Care Act was passed and many economic stimulus measures were enacted).  In recent times, however, an election “sweep” of one party is not common.  In fact, over the past 40 years, Republicans have had control of the presidency and both houses of Congress for just six years, and Democrats for only four.

Election day is November 3rd, 2020.  FiveThirtyEight.com, the political website run by statistician Nate Silver which aggregates polling data, gives Joe Biden a more than 80% chance of winning as of this writing.  It also gives Democrats a more than 65% chance of taking over the Senate.  Although far from certain, if there were to be a Democratic sweep, what would that mean for the US economy and the US stock market?

Moody’s Analytics recently completed an in-depth study of the economic outlook under various scenarios compared to the current policy.[1]  In a Democratic sweep scenario, they concluded that Biden’s significant planned fiscal spending would return the economy to full employment by the second half of 2022, much more quickly than what they predict under current policies.  Biden’s likely reversal of Trump’s trade policies and immigration policies would also contribute to faster growth.  Meanwhile, additional government spending on infrastructure, education, and the social safety net would lead to faster growth in government debt, expected to rise from 108% of GDP at the start of a Biden presidency to 120% by the end of his term and 130% in ten years.

Although a Democratic sweep is expected to drive growth for the economy overall, it’s always important to remember that the economy and the stock market are not the same. Changes in tax policy are likely to adversely affect corporate profits, which may mute stock market returns.  Moody’s predicts that more of the benefits in a Democratic Sweep scenario would accrue to workers and lower and middle-income households and less would accrue to businesses and higher-income households.  Stock prices rise in this scenario, but the Moody’s model predicts modest increases of about 4% per year over the next four years. 

It is notoriously difficult to base investment decisions on US elections – both because the outcomes are hard to predict but also because, contrary to popular belief, the evidence is not clear that stock markets do better under Republican administrations.  In fact, Jeremy Seigel, Professor of Finance at the Wharton School for the University of Pennsylvania and the author of Stocks For the Long Run recently stated “stock markets … perform better under Democrats than under Republicans,” although he hastens to add that “bull markets and bear markets come and go, and it’s more to do with business cycles than presidents”.

Of course it is also highly possible that Congress could remain split, in which case regardless of who is president we will likely see only modest changes in the fiscal environment.  2020 has already been a year of significant volatility, especially after a long period of market calm, and it remains to be seen what the final quarter brings.  We believe that keeping an eye on the longer term and staying invested in the global markets will enable investors to weather the short term volatility and allow longer term underlying economic growth, not short term predictions, to drive returns.  After all, markets have risen and fallen, but over the last 100 years there has never been a 20-year period in which stock market returns have been negative – including periods that incorporate the Great Depression in the 1930s.

 

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[1] It’s a fascinating paper based on the Moody’s Analytical Model, which is similar to that used by the Federal Reserve Board and the Congressional Budget Office for economic forecasting, budgeting, and policy analysis – if you’d like to read more, go to https://www.moodysanalytics.com/-/media/article/2020/the-macroeconomic-consequences-trump-vs-biden.pdf