Will stocks plummet if Joe Biden wins and the Congress is divided? Here’s what history says about stock market returns in this scenario.

In less than five months, Americans across the country will head to the polls or mail in their ballots to decide who will be the presidential candidate to lead our country for the next four years.

In many ways, what happens on Capitol Hill and in the Oval Office has nothing to do with Wall Street. But everything to do with fiscal policy legislation. totally It affects the U.S. economy, corporate earnings, and the stock market.

In a little over two months, the Democratic National Convention will be held, and incumbent Joe Biden will likely receive his party’s presidential nomination. To win the Democratic nomination, only 1,968 reserve delegates are needed, and as of June 6, Biden had 3,872.

Investors have had plenty of reasons to smile during Biden’s first term as president. timeless Dow Jones Industrial Average (^DJI -0.22%)benchmark S&P 500 (^GSPC -0.11%)Focus on growth stocks Nasdaq Composite (^IXIC -0.23%) They all broke new records. Since Biden entered the Oval Office on January 20, 2021, the Dow Jones, S&P 500, and Nasdaq Composite have risen 25%, 39%, and 28%, respectively.

President Joe Biden making remarks. Image credit: Official White House Photo by Adam Schultz.

However, during Biden’s term, stock market returns were noticeably different in the first and second half of his four-year term. The difference reflects Biden’s shift from a single Congress during his first two years in the Oval Office to a separate Congress in the second half of his term. That means Democrats and Republicans each control one house of Congress.

This begs the question: Could stock markets plummet if Joe Biden wins in November and Congress remains divided? Let’s take a look at the challenges incumbent Joe Biden will face in his reelection bid and let history be the ultimate judge and jury on the future of stocks.

Will stocks plummet if Joe Biden wins and Congress is divided in November?

Before we dig into the details of the headwinds ahead, let us be clear that there is no perfect predictor or indicator that guarantees near-term directional movement for the Dow, S&P 500, or Nasdaq. Certain indicators are highly correlated with large directional movements in the stock market, but nothing is certain.

That said, Joe Biden’s victory in November and a split Congress will face policy concerns and macro headwinds.

In terms of policy proposals, Biden made clear in his March State of the Union address that he wants American corporations and the wealthy to “pay their fair share.” He proposed raising the top marginal corporate tax rate from the current 21% to 28% and quadrupling the stock purchase tax from 1% to 4%. Share buybacks in particular have played a key role in fueling earnings growth on Wall Street over the past few years.

On the one hand, the Republican-controlled House of Representatives will desperately oppose these changes, while Wall Street will likely cheer them on. But don’t forget that the personal income tax rate cuts passed through President Donald Trump’s Tax Cuts and Jobs Act expire on December 31, 2025. It is unlikely that a divided Congress will extend these cuts, which would mean higher federal tax rates. This is about average and low discretionary spending in the United States.

Another concern for Joe Biden is that select and money-based indicators are predicting economic weakness. Keep in mind that these metrics have no impact on who will win in November.

WARNING: The money supply is officially shrinking. 📉

This has only happened four times in the last 150 years.

The Great Depression followed, each time with double-digit unemployment rates. 😬 pic.twitter.com/j3FE532oac

— Nick Geli (@nickgerli1) March 8, 2023

For example, the U.S. M2 money supply has fallen at least 2% from its all-time high for the first time since the Great Depression. The M2 money supply takes into account everything in M1 (cash and coins in circulation, demand deposits in checking accounts) and adds savings accounts, money market accounts, and certificates of deposit (CDs) worth less than $100,000.

M2 receives little attention because more capital is regularly needed to satisfy economic growth. However, M2 has declined a total of 3.94% since peaking in April 2022.

As seen in Reventure Consulting CEO Nick Gerli’s post on Using backtest data going back to 1870, Gerli points out that this is only the fifth time in more than 150 years that M2 has fallen by at least 2%. The four previous instances (1878, 1893, 1921, and 1931-1933) were all accompanied by double-digit unemployment rates and economic depressions in the United States.

The good news is that a recession and double-digit unemployment are very unlikely in today’s economy. The Federal Reserve has over 100 years of knowledge to rely on, and the federal government has tools it can use to stimulate growth and/or consumer spending.

However, despite these positive hopes, the decline in M2 is expected to reduce discretionary spending. In other words, it tends to be a precursor to an economic recession.

Based on policy proposals and the historic decline in M2 money supply over the past two years, stocks are could do With Biden winning and Congress divided, it could plummet.

Image source: Getty Images.

History tells us what happens when a Democrat wins the presidency and the Congress is divided.

Armed with a better understanding of the potential blowback that awaits Joe Biden’s re-election if paired with a divided Congress, let us now give history a voice and be the final judge of what happens next.

The best news I can give you is that history has proven to be exceptionally friendly to investors with a long-term mindset. When examined over several decades, every single combination you can think of – a unified government, a divided parliament, an opposition president and a united parliament – has produced positive average annual returns for the stock market. While these combinations obviously have some return differentials, the stock market has historically risen regardless of which candidate voters chose in November.

In January 2021, just before Biden took office, forbes Columnist and Integrity Wealth Management President Mike Patton published an article detailing the average annual returns of the Dow Jones Industrial Average under various scenarios. Interestingly, a split Congress produced the highest average annual return between 1946 and 2020 (12.9% average annual return) among the scenarios studied.

^DJI data from YCharts.

Online retirement analysis website Retirement Researcher goes one step further. Author Bob French published a report examining the performance of the S&P 500 from 1926 to 2023 using a variety of situations.

Over 34 years of elected Republican presidents and divided Congresses, the S&P 500 has delivered an average annual return of 7.33%. By comparison, over 15 years under Democratic presidents and a divided Congress, the average annual return for the S&P 500 was 16.63%. Based solely on historical data, a Biden victory with a divided Congress would be good news for Wall Street and investors.

If there’s a common theme to investing money on Wall Street, it’s that patience pays off. As economic expansion continues generally Bull markets on Wall Street tend to be long-lived, lasting longer than recessions.

It’s official. A new bull market has been confirmed.

The S&P 500 is currently up 20% from its close on October 12, 2022. In the previous bear market, the index fell 25.4% over 282 days.

Read more at https://t.co/H4p1RcpfIn. pic.twitter.com/tnRz1wdonp

— Bespoke (@bespokeinvest) June 8, 2023

As noted in a June 2023 post on X by researchers at Bespoke Investment Group, the S&P 500 has experienced 27 bull and bear markets since the Great Depression began in September 1929. By contrast, the average S&P 500 bear market lasted 1,011 days, about 3.5 times longer than the typical bull market over the last 94 years, which lasted only 286 days (about 9.5 months).

Another thing you may have noticed is that the longest bear market in S&P 500 history was longer than 13 bull markets. Stock market corrections and plunges are normal and inevitable, but they don’t last long.

While it is impossible to predict specifically what will happen in the coming months and immediately following the November election, history is clear that investors who are patient are perfectly positioned to succeed.