Historically, Markets Favor Democrats, But No Significantly
Each presidential race (and each presidency) is unique, and the parties change over time, adapting to shifts in their constituencies and the national environment, so history may apply more or less to the current race. But to the degree that history matters, it tells us that we probably should not put too much stock in political outcomes as a market driver. We think policies matter, but larger economic forces usually matter much more. As a result, pulling out of the stock market when either former President Barack Obama or President Trump was elected because of political concerns was, in hindsight, a big mistake—markets favored both. Politics makes us passionate and that’s a good thing—it keeps us engaged—and that’s what makes a democracy go. But strong political views potentially can interfere with sound investing decisions.
Working from straightforward calendar-year numbers, markets and the economy have seemed to do better under Democratic administrations. But if you change the angle or look at circumstances, there are plausible ways to show the historical numbers have favored either Republicans or Democrats. For example, adjusting for inflation and looking at the make-up of Congress as well as the presidency goes a long way to balancing things out. But a straightforward approach does show a clear Democratic tilt:
• 10 of 11 recessions since 1950 have begun under Republican presidents.
• Every Republican president since 1950 (except former President Gerald Ford) has seen a recession begin on his watch (five out of six), while only former President Jimmy Carter has on the Democratic side. The economy did not go into recession under Presidents John F. Kennedy, Lyndon B. Johnson, Bill Clinton, or Obama.
• Excluding 2020, which would skew the numbers unreasonably, gross domestic product (GDP) growth has averaged about 3.6% under Democrats and 2.8% under Republicans since 1950.
• As a result, S&P 500 returns have averaged a still strong 10% a year increase under Republican presidents, but a stronger 15% a year increase under Democrats over that time period.
• Playing against conventional wisdom, the difference in GDP is largely accounted for by higher defense spending and higher business investment under Democratic presidents. At the same time, the average budget deficit as a percent of GDP has tended to fall under Democratic presidents, while it has tended to rise under Republican presidents. (Sources: FactSet, Federal Reserve, US Bureau of Economic Analysis, NBER)
What To Expect From A Biden Presidency-Taxes
The primary market risk from a Biden presidency may likely come from potential tax increases. Higher business taxes directly impact the earnings of publicly traded companies, which may flow through to stock prices. There’s also the larger question of the impact of higher taxes on the overall economy.
Business taxes:
• The Trump administration lowered the corporate tax rate from 35% to 21%, which clearly had a positive impact on earnings and helped support markets. A Biden administration may raise the statutory rate back up to 28%, but it would likely take a Democratic sweep of Congress to enact. Even with a sweep, the move may be delayed depending on the economic environment. Even at 28%, the rate would be lower than prior to passage of the Tax Cut and Jobs Act of 2017.
• There are also lesser known tax provisions that potentially could impact businesses’ bottom lines, such as imposing a minimum corporate income tax and doubling the tax on global intangible low tax income (GILTI) from 10.5% to 21%. As above, both are unlikely to pass if the Republicans hold the Senate.
• Estimates vary on the impact to the bottom line. The tax rate alone will lift the effective tax rate a little over 5%, likely creating a similar headwind for the S&P 500. Other provisions could increase the impact on S&P 500 profits into the mid-teens or higher, although there are likely to be some offsets. Whatever the impact, some of it will likely be priced into the S&P 500 pre-election.