Elections are important for investors, and presidential elections are of great importance. Their outcome sets the agenda in Washington, DC for the next four years.
As usual, the Democratic and Republican US presidential candidates have very different goals. Would Kamala Harris or Donald Trump be better for the stock market? It’s complicated.
The carryover effect
A big reason it’s difficult to predict what the stock market will do under a new president is that things that happened during the previous president’s term can spill over into the new administration. History is full of examples of this spillover effect.
The S&P500 Interest rates fell by as much as 25% during the first 19 months of Ronald Reagan’s first term in office. However, this decline and the resulting recession were primarily due to the Federal Reserve’s interest rate hikes to curb the soaring inflation that had begun before Reagan took office.
Similarly, the S&P 500 fell 16 percent in 2001, the first year of George W. Bush’s first term in office. The sell-off was due to the continuation of the bursting of the dot-com bubble that began in 2000, the last full year of Bill Clinton’s second term as president.
Note that the carryover effect is not necessarily related to the actions of the previous president. For example, it was not former President Clinton who caused technology stock valuations to rise to unsustainable levels. This underscores another important point: there can be factors that affect the stock market that are outside of a president’s control.
The political puzzle
The policies of a new US president can influence the performance of stocks. However, sometimes different policies can offset each other to some extent.
For example, Republican presidential candidate Trump has proposed cutting corporate taxes. This could increase corporate profits and lead to higher stock prices. On the other hand, however, Trump also wants to impose high tariffs on all imports and even higher tariffs on Chinese imports. Many economists believe that the tariffs could drive up inflation, which could prompt the Federal Reserve to raise interest rates and cause stock prices to fall.
Democratic presidential candidate Harris has said she wants to “deal with big corporations that engage in illegal price gouging.” This could help lower inflation and boost stock prices. But Harris has also committed to raising the federal minimum wage. Some economists (though not all) believe minimum wage increases lead to higher inflation, which could hurt stock prices.
Party time
The Republicans want to be seen as a business-friendly party, while the Democrats are more likely to fight against what they see as the corrupt practices of some large corporations. Does this mean that the stock markets are more likely to soar under a Republican president than under a Democratic one? Not necessarily.
Since 1957, the S&P 500 has averaged 9.9% annual returns (excluding dividends) during the years that Republicans were presidents. However, during the terms of Democratic presidents, the S&P’s average annual return was 12.9%.
It also matters which party or parties control Congress. A divided Congress has been best for the S&P 500 regardless of which party’s candidate occupied the Oval Office. Between 1950 and 2023, the S&P posted an average annual gain of 15.72% with a Democratic president and a divided Congress. The index’s average annual return over the same period with a Republican president and a divided Congress was 12.2%.
The best answer
So would Harris or Trump be better for the stock market? The best answer is… nobody knows. However, there are Is The best answer to the question of what investors should do whether Harris or Trump wins in November is: Don’t just focus on a four- or eight-year period – think long-term.
Over the long term, the stock market is up 100%. Presidencies come and go, but American companies continue to work year after year to generate profits for their shareholders. While elections are important to investors, the time they spend in the market is much more important.
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Would Kamala Harris or Donald Trump be better for the stock market? It’s a complicated matter. was originally published by The Motley Fool
