History offers clear clues about what will happen if Donald Trump wins in November and Congress remains divided.
A little over five months from now, Americans will head to the polls or cast their ballots by mail to decide what direction the country will take for the next four years.
While there are many aspects of the legislation that have absolutely nothing to do with what’s going on on Wall Street or in corporate America, the fiscal policy changes passed by Congress are can It will affect the US economy and stock market.
With less than two months until the Republican National Convention, former President Donald Trump appears to be the front-runner in the race for the presidential nomination. As of May 21, Trump had secured 2,181 delegates, nearly double the 1,215 needed to secure the party’s nomination.
During President Trump’s first term (January 20, 2017 – January 19, 2021), ageless Dow Jones Industrial Average (^DJI 0.01%)wide range S&P 500 (^GSPC 0.70%)and the driving force behind growth Nasdaq Composite Index (^IXIC 1.10%) They achieved increases of 56%, 67%, and a staggering 138%, respectively.
Then-President Donald Trump speaks to reporters. Image courtesy of Official White House Photo by Andrea Hanks.
But stock market returns under Trump’s administration were quite different during his first two years in office, when he enjoyed a unified Republican Congress, than during his final two years, when Democrats controlled the House of Representatives and Republicans controlled the Senate.
If Donald Trump wins in November and a divided Congress emerges, will the stock market suffer a catastrophe? We take a closer look at the challenges that President Trump and a divided Congress would face, and history will ultimately determine what happens next.
Will a Trump victory and a divided Congress send stocks plummeting?
In all fairness, there is no predictive data point on earth that can guarantee how Wall Street will perform based on who becomes president or whether Congress is divided or united. To be sure, there are very clear headwinds ahead. Some of these may be policy-based, but others will pose a threat to the Dow, S&P 500, and Nasdaq Composite Indexes regardless of who is in office on January 20, 2025.
On the policy front, President Trump and a Democratic-controlled Congress are likely to clash on a number of issues, the most important of which for Wall Street will be taxation (both personal and corporate).
Perhaps the most memorable piece of legislation passed during President Trump’s term is the Tax Cuts and Jobs Act (TCJA). This law reduced personal income tax rates and created a flat corporate tax rate of 21% (down from 35%). President Trump will likely push to continue the TCJA tax rates, which are scheduled to be repealed by December 31, 2025, but Democrats are unlikely to support such a move given the nation’s growing debt and continuing budget deficits. Note that the corporate tax rate changes are permanent (i.e., they will not be repealed after 2025).
The prospect of higher personal income tax rates is worrying, as reducing consumers’ disposable income could very well hurt the growth prospects of Wall Street’s fastest-growing companies.
But regardless of who wins in November, macroeconomic headwinds may pose an even bigger threat to Wall Street than the dispute over policy between President Trump and congressional Democrats.
WARNING: The Money Supply is Officially Contracting. 📉
This has only happened four times in the past 150 years.
Each time, a major depression followed, with unemployment reaching double digits. pic.twitter.com/j3FE532oac
— Nick Gerli (@nickgerli1) March 8, 2023
The evolution of the U.S. M2 money supply over the past two years is a perfect example: M2 money supply takes into account all cash, coin, and checking deposits in bank accounts included in M1, plus savings accounts, money market accounts, and certificates of deposit (CDs) under $100,000.
Most investors and economists pay little attention to this as the money supply has been growing uninterrupted for the better part of 90 years. For an economy to expand, it needs more capital in circulation to keep the proverbial hamster on its wheel.
However, since April 2022, M2 has witnessed a historic decline. After peaking at $21,722 billion in April 2022, as of the Federal Reserve’s April 2024 update, M2 has fallen by $881 billion. This total decline of 4.06% is less impressive given that M2 grew by a record 26% year-over-year during the height of the COVID-19 pandemic, but it still marks the first time since the Great Depression that M2 has fallen by more than 2%.
As can be seen in this post by Reventure Consulting CEO Nick Gerli, a year-over-year decline in M2 money supply of more than 2% can’t believe it Rare. Looking back to 1870, there have only been five significant declines in M2: in 1878, 1893, 1921, 1931-1933, and 2023. All four of these declines in M2 were associated with economic recessions and high unemployment.
Regardless of who wins in November, the good news is that the Federal Reserve and the federal government have the tools and the understanding to avoid the precipitous decline of the U.S. economy seen in the late 19th and early 20th centuries. That said, historically, declines in the M2 money supply have been a precursor to significant declines in the U.S. economy and stock market.
In other words, there’s always the possibility that a divided Trump presidency and Congress could send stocks plummeting.
Image source: Getty Images.
This is what happens when Republicans win the presidency and Congress is divided
Knowing that Donald Trump and a divided Congress will undoubtedly face challenges, let’s dive right in and see what history says about stock market returns if a Republican wins the presidency and there’s a divided Congress.
Let’s start with the best news: No matter how you arrange the pieces of the puzzle, no matter which party controls the White House or whether Congress is united or divided, the stock market has, on average, delivered positive annual returns. every scenario.
According to calculations Forbes According to Mike Patton, columnist and president of Integrity Wealth Management, a “divided Congress,” regardless of which party controls the White House, has provided investors with the most robust returns of any scenario between 1946 and 2020. During this 75-year period of divided congressional leadership, the Dow Jones delivered an average annual return of 12.9%.
^SPX data from YCharts.
Retirement Researcher, a retirement-focused website, went even further and looked at the annualized returns of the S&P 500 from 1926 to 2023. What Retirement Researcher found was a 34-year period with Republican presidents and a divided Congress. During those years, the average annualized return of the S&P 500 was 7.33%. Interestingly, this is less than half the average annualized return of 16.63% under Democratic presidents and a divided Congress.
Still, the key point remains: Republican presidents and divided Congresses have historically produced decisively positive returns for investors.
While the stock market and the U.S. economy are not tightly linked, a growing economy tends to be good for U.S. companies.
Since the end of World War II, there have been 12 recessions. Of those 12 recessions, 9 lasted less than a year, and the remaining 3 lasted no longer than 18 months. By comparison, most economic expansions lasted for several years, sometimes reaching the decade mark. Business cycles are not linear, and that certainly benefits the Dow, S&P 500, and Nasdaq Composite.
It’s official. A new bull market has been confirmed.
The S&P 500 is currently up 20% from its closing low on October 12, 2022. During the previous bear market, the index fell 25.4% in 282 days.
For more details, please visit https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp
— Bespoke (@bespokeinvest) June 8, 2023
As this post by researchers at Bespoke Investment Group makes clear, disproportionately long periods of economic growth lead to longer Wall Street bull markets. Since the start of the Great Depression in September 1929, the average S&P 500 bear market has lasted just 286 calendar days, while the typical bull market has lasted around 1,011 calendar days, or about 3.5 times longer.
Additionally, 13 of the 27 S&P 500 bull markets over the past 94 years have lasted longer than the longest bear market over the past 90+ years.
Stocks could fall sharply if Trump wins in November and Congress remains divided, but history suggests that long-term investors will be in an advantageous position no matter what happens this election season.
