Reader Pushback — Dem Sweep May Not Clobber Stocks
Author: Greg Valliere
June 26, 2020
WE LOVE READER PUSHBACK, it keeps us on our toes. Several readers emailed yesterday that a “trifecta” — with the Democrats winning the White House, Senate and House — wouldn’t necessarily clobber the stock market.
OUR SENSE IS THAT A JOE BIDEN presidency, with both houses controlled by Democrats, would have negative implications for tax rates and several key sectors — energy, defense, financial services, health care, etc. But some of you disagree.
THERE ARE LIES, DAMNED LIES AND STATISTICS, according to Mark Twain and others, and that surely applies to the confusing track record when one party controls the White House, the Senate and the House. You can juggle the statistics and make any case.
MOST RECENTLY, ONE PARTY CONTROLLED ALL THREE — the Republicans in 2017-18. The S&P 500 rose by about 22% in 2017 but fell by about 4-1/2% in 2018. The Democrats controlled all three in 2009-10, when the market rebounded from a disastrous 2008 (down 37%) and rose by 27% in 2009 and about 15% in 2010.
THE REPUBLICANS CONTROLLED ALL THREE in 2005 and 2006, when the S&P rose by a only 5% in 2005 and by about 16% in 2006. The GOP controlled all three in 2003-04, and the market rose by about 27% in 2003 and about 11% in 2024. Early in Bill Clinton’s presidency, the Democrats controlled all three; the S&P 500 rose by 9.4% in 1994 and only 1.3% in 1994.
IN SOME RECENT YEARS — 1995, 2013 and 2019, for example — the stock market did extremely well with divided government. We continue to believe the old adage that divided government is the best market scenario because “Washington does less harm.”
IN THE FINAL ANALYSIS, we think one party controlling all three is only one of
many variables — there are others, including where the country is in the economic
cycle, the Federal Reserve’s monetary policy, geopolitical developments, etc.
THE STOCK MARKET has been jittery lately, largely because of the country’s dysfunctional response to a resurgence of Covid-19. But part of the market anxiety may stem from the growing possibility that Biden could win in a landslide — and if he wins in a landslide the the Democrats almost certainly would capture the Senate while keeping the House.
TAX INCREASES would be inevitable if Biden gets a trifecta, and while Bill Clinton’s
tax hikes didn’t hurt the economy, we would worry about a major tax hike if the White
House, the Senate and the House are controlled by Democrats.
THE FINANCIAL MARKETS would worry most about corporate taxes, which could rise by several points next year if there’s a trifecta, accompanied by loophole closers and a new minimum business tax — not a good scenario for earnings.
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