This is The Best Election Outcome for Markets

(Yahoo! Finance) - Trump or Biden: Who will be better for the economy, for corporate profits, and for stock market returns?

This is how many investors frame the 2024 presidential election. But focusing just on the two headline candidates misses a factor that may matter more: Markets do best under split government, when one party controls the White House and the other controls at least one chamber of Congress. From this perspective, the battle for control of the Senate and House of Representatives is just as important as the race for the White House.

Stocks do better when neither party has the votes to enact partisan legislation. Since 1933, the average annual return for the S&P 500 index has been 15.7% when a Democratic president had a split Congress and 13.7% when a Republican president did, according to Bloomberg data. Average returns were 12.9% when Republicans had total control and 9% when Democrats called all the shots.

Unified government, when one party controls Congress and the White House, tends to produce the most dramatic policy changes, such as when Democrats passed the Affordable Care Act (ACA) in 2010 and Republicans passed a sweeping series of tax cuts in 2017. During President Biden’s first two years in office, Democratic control of Congress allowed him to sign a huge stimulus bill and the largest set of green energy incentives in US history. Such big changes can transform whole industries and reshape corporate investing decisions.

A lot less happens under split government, when each party has a check on the other. That leaves fewer policy changes for investors to digest.

While there are only two possible winners in the 2024 presidential election — Joe Biden or Donald Trump — there are eight governing scenarios for 2025. Either candidate could win with his party in full control of Congress. Either could win with the other party in full control of Congress. And either candidate could win with his party controlling the House but not the Senate, or vice versa.

What matters most is whether the government is unified or split, which simplifies it down to four scenarios. Biden could win with a Democratic Congress or a split one, and Trump could win with a Republican Congress or a split one. These are the breakdowns that will determine some crucial outcomes under the next president, including the fate of tax cuts that expire in 2025, the pace of the green energy transition, and healthcare availability.

Trump and Biden are running neck and neck in polls, making the presidential election a toss-up at this point. Republicans seem likely to win control of the Senate in November, mainly because Democrats have to defend more contested seats than Republicans. The House, meanwhile, could flip back to Democratic control.

Tobin Marcus, head of policy and political strategy at Wolfe Research, puts the odds of a Republican trifecta — Trump winning the White House and Republicans controlling both houses of Congress — at 40%. His odds of Biden winning with a split Congress are also 40%. Trump winning with a split Congress and Biden winning with a fully Democratic control are far less likely, with a 10% chance of each.

Here’s the outlook under each of those four scenarios.

Biden wins with split control of Congress. This is a status quo scenario in which much would remain the same as it is now. One of the biggest issues in the next president’s term will be the expiration of the 2017 tax cuts for individuals at the end of 2025. If Congress does nothing, it would amount to a de facto tax hike for most Americans, so Congress is likely to act under any scenario. Biden wants to let all those tax cuts expire except for those applying to people earning less than $400,000 per year, which would raise taxes on the wealthy. But if Biden wins a second term and Republicans control at least one chamber of Congress, they might be able to block most or all of the tax hikes Biden prefers.

Biden wins with full Democratic control of Congress. Biden could get his way on tax hikes if Democrats control both houses of Congress next year and can use special rules to get around the Senate filibuster. In addition to higher taxes on incomes above $400,000, Biden wants to raise the corporate tax rate from 21% to 28%. But he couldn’t get the votes for that when Democrats controlled Congress during his first two years, so it might not be in the cards. Other big legislation seems unlikely, given everything Biden has signed already, but he could try again at smaller goals such as making an expanded child tax credit permanent.

Trump wins with a split government. In terms of legislation, this could be similar to Biden winning with a split government. Democrats would have some leverage to demand higher taxes on the wealthy as part of extending the 2017 tax cuts for most others. Trump wants to kill many of Biden’s green energy incentives, and he has floated the idea of cutting Medicaid and even trying again to repeal the ACA. But Democrats would be able to block him if they held one chamber of Congress.

There are other things Trump would likely do that don’t require congressional approval. He wants new tariffs, as high as 60%, on all Chinese imports, and a 10% tariff on imports from everywhere else. He could impose those unilaterally. Trump also vows a massive campaign to deport undocumented migrants and sharply restrict border crossings. He’d undo many Biden-era regulations on energy, automobiles, and banks, and probably replace Federal Reserve Chair Jerome Powell, which could rattle markets given that Fed policy is often one of the biggest factors in investing decisions.

Trump wins with full Republican control of Congress. A fully empowered Trump would probably try to roll back many of Biden’s green energy provisions and claw back new funding meant to modernize the IRS and beef up tax enforcement. He’d also have a good chance of extending all the 2017 tax cuts. Republicans could pass Medicaid cuts and try again to repeal the Affordable Care Act, which now provides health coverage for roughly 40 million Americans. Getting some of these through Congress might require sizeable Republican majorities, since a few Republicans might not be on board.

So for anybody hoping to trade change and uncertainty in 2025, a Trump trifecta would be the desired outcome of the 2024 elections. The calmest outlook for markets, at least politically, would be a second Biden term with Republicans holding at least one chamber of Congress. But that only appeals if you like the way things are going now.

By Rick Newman - Senior Columnist

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