July 19, 2024

Divided or United: How the 2024 Election Could Shape the Economy and Markets

The upcoming 2024 presidential election has become a focal point for investors, as they weigh the potential economic implications of a victory by either Joe Biden or Donald Trump. However, the true influence on the markets may hinge not solely on the presidential victor but on the composition of Congress. Historical data suggests that a divided government, where legislative and executive branches are controlled by different parties, often yields the most favorable conditions for the stock market.

Analysis of market performance dating back to 1933 reveals a clear pattern: the S&P 500 index has generally delivered higher average annual returns during periods of political division. Specifically, the index saw a 15.7% return when a Democrat was in the White House with a split Congress and a 13.7% return under a Republican president with similar congressional division, according to Bloomberg. In contrast, returns dipped to 12.9% with Republican dominance across the board and plummeted to 9% under full Democratic control.

The rationale behind these figures lies in the nature of policy-making during divided government. Major policy overhauls, such as the Affordable Care Act (ACA) and significant tax cuts enacted under unified government scenarios, have profound impacts on industries and investment landscapes. These dramatic shifts are less common in split governments, leading to a more predictable environment for investors.

Looking ahead, the 2024 election presents eight potential government compositions, reduced to four principal scenarios considering the potential for unified or divided governance. These scenarios encompass Biden or Trump winning with their party controlling both Congress chambers, the opposite party in control, or a split Congress. The stakes are high, with key issues like the expiration of the 2017 tax cuts, the pace of the green energy transition, and healthcare policy on the line.

Polls indicate a tight race between Biden and Trump, with the Republican party poised to potentially seize the Senate due to the Democrats defending more seats. The House of Representatives, meanwhile, could swing back to Democratic control. Tobin Marcus of Wolfe Research posits a 40% likelihood for both a Republican trifecta and a Biden presidency under a split Congress. Scenarios involving Trump with a split Congress or Biden with full Democratic control are deemed less probable, at 10% each.

The consequences of these scenarios are profound. A Biden victory with split Congress likely means a continuation of the status quo, particularly concerning the 2017 tax cuts set to expire by the end of 2025. In contrast, a Trump win could lead to attempts to repeal Biden’s green energy incentives, introduce significant tariffs, and enforce stricter immigration policies, among other unilateral actions.

Moreover, a Trump presidency with Republican Congress could see an aggressive rollback of Biden’s policies, including efforts to extend the 2017 tax cuts and possibly repeal the ACA. This scenario promises the most change and uncertainty, making it the most consequential for market dynamics.

In conclusion, while the presidential election captures the spotlight, the composition of Congress could have an equally, if not more, significant impact on the economy and markets. Investors might find a split government to be the most beneficial, as history suggests it brings stability and predictability to the markets. As the political landscape unfolds, the implications for policy and investment will remain a central theme for market watchers.


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