After one of the most contentious elections in history, Biden has won the Presidency. Pelosi holds the House (though diminishing the strength of her majority) and, by taking Georgia, Democrats have a slim majority in the Senate (50-50 with Harris being the tie breaking vote). To many, it looks like the Democrat agenda is in play.
Given the distribution concerns surrounding COVID-19 vaccines, Democrats may want to increase stimulus for households. One Democrat proposal is to send every household an additional $2,000 check, not a $600 check. While this was blocked during the Trump administration, many are asking: can we expect another check once Biden takes office, and how would it impact the economy going forward?
While the Republican party has been cautious about borrowing more money to increase stimulus, many Democrats feel differently. What we’ve seen historically is that borrowing money and handing it out juices the market. We tend to see increased earnings and stock prices in the short-term. However, when we look at the long-term, the debt tends to be a drag on GDP growth.
In addition to more COVID-19 stimulus, Biden called for an enactment of a 10-year, $1.3 trillion plan for transportation infrastructure. According to Transportation Topics, “the Biden plan would dedicate $50 billion for fixing highways and bridges, and $5 billion over five years to electric vehicle batteries. The plan also would target $400 billion over a decade for research and innovation of clean energy, and $20 billion for rural broadband. Additionally, $5 billion would target states to promote small businesses.”
Assuming the infrastructure plan is passed, we’d likely see a massive injection of money into the economy, which would be followed by a positive boost to the stock market.
Though regulation, tax policy, stimulus plans, and trade policy play a role, we often see that corporate earnings, interest rates, the market cycle, and right now, the COVID-19 crisis, have a greater impact on the economy and the stock market than which party holds office. While the two components of the Biden administration's upcoming plans listed above may provide short-term boosts to the stock market, let’s discuss what we’ve seen historically and a few projections of our own.
While many believe the Republican party to be better for the stock market, according to the New York Times, the markets generally don’t do worse under Democratic control. While past performance doesn’t guarantee future results, under Obama’s first two years in office, in which he had a stronger majority in Congress, the market (S&P 500) was up 59%! Overall, we’ve seen good returns under both Democratic and Republican presidencies, so we’re optimistic about the next four years.
Markets generally do better under divided government than under either Republican or Democrat control. The division of power ensures that the rules of the game don’t change as quickly for businesses or investors, and these lower levels of uncertainty generally boost market prices. For businesses it’s easier to plan if they know the laws and regulations they have to function under.
Despite that, we’ve generally seen good markets under both Democrat and Republican control and investors would be remiss to not continue to participate in the market over the next two (or more) years in which Democrats hold control of the government.
A concerning trend we’ve seen over time though is that some people choose to get out of the market and don’t stay invested when their opposing party is in office. When we look at those who only stay invested when the Republican party is in office and those who only stay invested when the Democratic party is in office, they BOTH significantly underperform compared against those who stayed fully invested when either party was in office.
This is a huge investment mistake we see, often driven by fear or uncertainty, that can significantly impact long-term returns.
There are those who are excited about the change in national leadership and others who are fearful of what it means for the market and their tax situation.
In the aftermath of an election, people are likely to react—making drastic changes to their portfolio or tax plan out of optimism or fear—which can end up hurting their long-term results. Before changing your investment or tax strategy, get a second opinion from our financial advisors who can offer an additional perspective about the implications of various strategies before you implement them. The next 2-4 years are only a brief moment in your investment history so you’ll want to understand how your financial goals could be affected before making any long-term strategy decisions.