The United States has elected Joe Biden to be its next President. Despite there being a last-ditch effort by President Trump to muddy the waters with claims of massive voter fraud, the country is beginning to move ahead. The S&P 500 has rallied 6.04% as of the morning of this writing (November 18th) from the day after Election Day (November 4th) and is pricing in a smooth transition of power. This transition of power is what separates the United States of America from other countries in the world and is the backbone of what makes our country so strong. President Trump has displayed that he has no intentions to concede, and will fight the results of the election until he has extinguished every option. This uncertainty may provide some market volatility in the short term, but I expect that volatility to be short-lived.
If you voted for Joe Biden, you are likely thrilled your candidate won. You may be thinking that many progressive ideas are about to become law: policies to combat climate change, student loan forgiveness, universal health care, expanding the Supreme Court, raising taxes, and granting statehood to Washington D.C. and Puerto Rico. Likewise, if you voted for Donald Trump you may think the worst is to come if any of those policies come to fruition. There is a chance the 2 Senate seats in Georgia go to Democrats, giving them a majority in the Senate when you consider the Vice President tie-breaking vote; however, given Georgia’s history, it appears that Democrat’s winning both seats is unlikely. That leaves a gridlocked Congress – which means not that much is going to get done. President-elect Biden will be lucky to get one or two of his dream policies through, and even then, it will be a watered-down version to get the votes.
The truth is, the stock market does well when both Republicans and Democrats are President. The stock market does well when Republicans control congress and when Democrats control congress. But historically speaking, a Democrat President and gridlocked Congress is the most favored scenario by the stock market. This gridlock typically means there won’t be much change in the status quo which provides fertile ground for equities.
Let’s look at some of the historical data.
S&P 500 Annual Average Returns: Democrat vs Republican
The first piece we will look at is a table comparing all data going back to 1926 through YTD 2020. I’ve broken this out into both Democrat and Republican Presidents. There is almost an even breakdown in the sample size. You’ll see, on average, the S&P 500 has performed better when a Democrat is President compared to when a Republican is President by 5.7%.
S&P 500 Average Annual Returns: Congressional Control vs Gridlock
The next table we will look at is going to consider when Congress is gridlocked with the President (one or both houses are controlled by a different party than the President’s) and when Congress and the President are controlled by the same party. There are many more instances where Congress is gridlocked – but even with that gridlock, the average S&P 500 return is 10.3% - below the average for all 95 observations (see the previous table). The good news is, when you break these out to when Congress is gridlocked with a Democratic President, the average annual return in the S&P 500 is 15.8%, about 3.7% higher than the average return in a given year no matter the President or Congress makeup. This is what I mean by saying it appears the stock market favors a situation where there is a Democrat President and gridlocked Congress.
S&P 500 Average Annual Returns: Democrat President in 1st Year of Term
The last data set we will look at is what happens in the 1st Year of a Democratic Presidential term. Going back to 1926, there have been 12 years where this is the case. 9 of those years had a positive return in the stock market and 3 were negative and the average annual return has been 16.42% - higher than the average return regardless of term year when a Democrat is President (14.9%).
Looking at the market through a political lens, it would appear conditions are ripe for another great year in the stock market in 2021. When you consider the easy money policy by the Federal Reserve (which pushes up asset prices) along with the developments of a COVID-19 vaccine, I am remaining bullish for 2021 as well as beyond. After all, the stock market has a positive annual return 73.7% of the time. There are certain factors that give me pause (i.e. China, climbing cases of COVID-19, and continued post-election unrest); but, by not letting the daily ups and downs of the stock market dictate my investing decisions, I am able to take a long-term investment horizon - regardless of who is President. Of course, all the above data is in the past and is not a predictor of future returns.
The last 4 years have been great for the stock market (average annual return of 15.63% as of this writing), but volatile on the home front. We need to set aside political differences and focus on what brings us together rather than what pulls us apart. No matter what your political party is, the majority of what we want is going to be the same: family, safety, health, shelter, education, and the pursuit of happiness. The part that gets everyone riled up is how to accomplish those things. If we can tone down the political rhetoric and inflaming the other side – we might be able to find some common ground with one another and move us closer to improving the lives of Americans – or at least put people in a better position to improve their lives.
If we can do that, if we can get back to what brings out the best in Americans – then the sky is the limit. No matter who is President.
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About The Author
Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN. Melby Wealth Management serves clients as a fiduciary and never earns a commission of any kind. Shaun has over 10 years of experience as a financial advisor in Nashville.