Stocks just had their best week since April, with the S&P 500 Index incredibly a chip shot away from new all-time highs. Joe Biden will be the next President of the United States, but markets are confident Republicans will maintain the Senate, and this means gridlock in Washington. Remember, gridlock is good, as it pulls policy towards compromise and avoids extremes. Also, any legislative changes to taxes, regulation, and capital gains will have meaningful input from both parties.
As shown in the LPL Chart of the Day, a split Congress tends to mean stronger stock returns, almost ignoring whether a Democrat or Republican is in the White House. The most likely outcome from the election at this point is a Democratic president with a divided Congress—a scenario that historically has produced solid S&P 500 returns of 15.9% a year.
Assuming President-elect Joe Biden takes over in January 2021, it is important to note that historically stocks haven’t done as well the first and second years of a new president compared with an incumbent winning. This makes sense though, as historically voters may have chosen new leadership in part because of economic weakness, and the uncertainty of a new president’s policies could also hold things back some. If things are good, the president tends to win reelection. Things turn around significantly by the third year in office, though, if there’s new leadership. Of course, it’s worth noting that the first year of a new president has seen the S&P 500 higher recently, with stocks up nearly 20% the first year under President Donald Trump (2017) and 23% under President Barack Obama (2009).
Lastly, the strength from stocks around the election has been rather historic. “The S&P 500 added 1% on four consecutive days, which hasn’t happened since late 1982,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Although there are only three other times this rare blast of strength happened since WWII, it is worth noting that strong returns going out a year took place after each instance.” The bottom line: Extreme buying pressure has a funny way of resolving higher, and we don’t anticipate this time being any different.
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