History will tell us what will happen on Wall Street if Joe Biden wins in November and Congress remains divided between Democrats and Republicans.
In less than five months, Americans across the country will head to the polls or cast their ballots by mail to decide which presidential candidate will lead our great country for the next four years.
In many ways, what happens on Capitol Hill and in the Oval Office is none of Wall Street’s business. But when it comes to fiscal policy legislation, absolutely It impacts the U.S. economy, corporate earnings, and the stock market.
The Democratic National Convention is just over two months away, and incumbent Joe Biden will likely win the party’s presidential nomination. As of June 6, Biden has secured 3,872 delegates, out of the 1,968 required to secure the Democratic nomination.
Investors have had plenty of reasons to smile during President Biden’s first term. Dow Jones Industrial Average (^DJI -0.22%)standard S&P 500 (^GSPC -0.11%)with an emphasis on growth stocks Nasdaq Composite Index (^IXIC -0.23%) Since Biden took office as president on January 20, 2021, the Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite Index have risen 25%, 39%, and 28%, respectively.
President Joe Biden delivering the speech. Image credit: Official White House Photo by Adam Schultz.
But stock market returns under Biden’s presidency have been markedly different in the first and second halves of his four-year term, as the shift from a unified Congress during Biden’s first two years in office to a divided Congress in the second half of his term, with Democrats and Republicans controlling one house each.
This begs the question: if Joe Biden wins in November and Congress remains divided, could the stock market crash? Let’s take a closer look at the challenges that incumbent Joe Biden would face if re-elected, and history will be the final judge of how the stock market will fare going forward.
If Joe Biden wins in November and we have a divided Congress, will stocks crash?
Before we dive into the details of the headwinds that lie ahead, let us be clear that there are no foolproof predictors or metrics that guarantee the near-term direction of the Dow, S&P 500, or Nasdaq. While certain metrics are highly correlated with larger directional movements in the stock market, nothing is certain.
That said, if Joe Biden wins in November and a divided Congress emerges, he will face policy concerns and macroeconomic headwinds.
In terms of policy proposals, Biden made it clear in his State of the Union address in March that he wants American corporations and the wealthy to pay their “fair share.” He proposed raising the top marginal corporate tax rate to 28% from the current 21% and quadrupling the stock buyback tax from 1% to 4%. Stock buybacks in particular have played a key role in fueling Wall Street profit growth in recent years.
Meanwhile, the Republican-controlled House of Representatives would vehemently oppose these changes, but Wall Street would likely welcome them. But let’s not forget that the individual income tax rate cuts passed under President Donald Trump through the Tax Cuts and Jobs Act expire on December 31, 2025. With a divided Congress, it’s unlikely these cuts will be extended, meaning the average American will see higher federal tax rates and less discretionary spending.
Another concern for Joe Biden is that certain metrics and money-based indicators point to a weaker economy going forward, although it should be noted that these metrics have no bearing on who wins in November.
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
For example, the U.S. M2 money supply has fallen by at least 2% from its all-time high for the first time since the Great Depression. M2 money supply takes into account all of M1 (cash and coin in circulation and current deposits in checking accounts) and adds in savings accounts, money market accounts, and certificates of deposit (CDs) under $100,000.
M2 rarely gets much attention because more capital is periodically needed to fill an expanding economy, but since peaking in April 2022, M2 has fallen by a total of 3.94%.
As Riventure Consulting CEO Nick Gerli’s X post shows, it’s rare for the M2 money supply to fall by more than 2%. Using data going back to 1870, Gerli points out that this is only the fifth time in over 150 years that M2 has fallen by more than 2%. The previous four times (1878, 1893, 1921, and 1931-1933) were all accompanied by double-digit unemployment and economic recessions in the US.
The good news is that recessions and double-digit unemployment are highly unlikely in today’s economy, and with more than a century of accumulated knowledge from the Federal Reserve, the federal government has tools it can use to spur growth and consumer spending.
But despite this silver lining, a contraction in M2 is expected to reduce discretionary spending, which in turn tends to be a harbinger of recession.
Based on the policy proposals and the historic decline in M2 money supply over the past two years, stocks did it A Biden victory and a divided Congress could send stocks plummeting.
Image source: Getty Images.
This is what happens when a Democrat wins the presidency and Congress is divided
With a better understanding of the potential headwinds that lie ahead if Joe Biden’s reelection combines with a divided Congress, we will let history have its say and ultimately determine what happens next.
The best news I can give you is that history strongly favors investors with long-term thinking. Looking across decades, every possible combination (unified government, divided Congress, unified Congress with a president from the opposite party) has produced positive average annual stock market returns. While these combinations certainly have varying returns, the stock market has historically risen regardless of which candidate voters select in November.
In January 2021, just before Biden took office, Forbes Columnist and President of Integrity Wealth Management, Mike Patton, published an article detailing the average annual returns of the Dow Jones Industrial Average under various scenarios. Interestingly, of all the scenarios examined, a divided Congress produced the highest average annual return from 1946 to 2020, with an average annual return of 12.9%.
^DJI data from YCharts.
Online retirement analysis website Retirement Researcher went a step further: Author Bob French published a report examining the performance of the S&P 500 from 1926 to 2023 under a variety of circumstances.
In 34 years with Republican presidents and a divided Congress, the S&P 500 has delivered an average annual return of 7.33%. In comparison, in 15 years with Democratic presidents and a divided Congress, the S&P 500 has delivered an impressive average annual return of 16.63%. Based on historical data alone, a Biden victory with a divided Congress would be good news for Wall Street and investors.
If there’s one common theme when it comes to managing money on Wall Street, it’s that patience pays big dividends. As long as the economic expansion continues, Drastically Wall Street bull markets tend to last longer than recessions.
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 a June 2023 post by researchers at X’s Bespoke Investment Group shows, the S&P 500 has experienced 27 bull and bear markets since the start of the Great Depression in September 1929. While the average bear market in the S&P 500 lasted just 286 calendar days (about 9.5 months), the typical bull market over the past 94 years lasted 1,011 calendar days, roughly 3.5 times longer.
You may also have noticed that the longest bear market in the history of the S&P 500 has been surpassed in length by 13 bull markets. Stock market corrections and sell-offs are normal and inevitable, but they don’t last very long.
While it’s impossible to predict specifically what will happen in the coming months and immediately following the November election, history has shown that investors who exercise patience are well positioned to succeed.
