Trump or Biden: Which is better for the economy, corporate profits, and stock market profits?
Many investors are predicting the 2024 presidential election this way. But focusing only on the two leading candidates overlooks a potentially more important factor. The idea is that markets work best under divided government, where one party controls the White House and the other party controls at least one Congress. From this perspective, the fight for control of the Senate and House is as important as the fight for the White House.
Stocks fare better when neither party has the votes to enact partisan legislation. Since 1933, the average annual return for the S&P 500 index has been 15.7% when a Democratic president divides Congress and 13.7% when a Republican president divides Congress, according to Bloomberg data. The average return was 12.9% when Republicans were in full control and 9% when Democrats decided everything.
In a unified government, where one party controls Congress and the White House, as was the case when Democrats passed the Affordable Care Act (ACA) in 2010 and Republicans passed a series of major tax cuts in 2017, The most dramatic policy changes tend to occur. During Biden's first two years in office, Democratic control of Congress enabled him to sign a huge stimulus bill and the largest green energy incentives in U.S. history. Such major changes can transform entire industries and reshape companies' investment decisions.
Under divided government, this rarely happens because each party keeps the other in check. Therefore, there are fewer policy changes for investors to digest.
While there are only two potential winners of the 2024 presidential election, Joe Biden or Donald Trump, there are eight possible governing scenarios for 2025. Either candidate could win, giving their party full control of Congress. Either party could win if the other party takes full control of Congress. And either candidate could win with their party controlling the House but not the Senate, or vice versa.
The most important question is whether the government will be unified or divided, which is simplified into four scenarios. Mr. Biden could win with a Democratic Congress or a divided Congress, and President Trump could win with a Republican Congress or a divided Congress. These breakdowns will determine several important outcomes under the next president, including the fate of tax cuts that expire in 2025, the pace of the transition to green energy, and the availability of health care.
Opinion polls show Trump and Biden in a close race, making the presidential election a close race at this point. Republicans appear likely to win the Senate majority in November, primarily because Democrats will have to defend more contested seats than Republicans. Meanwhile, the House of Representatives could return to Democratic control.
Tobin Marcus, director of policy and political strategy at Wolf Research, estimates the probability of a Republican trifecta at 40%, with Trump winning the White House and Republicans controlling both houses of Congress. Even with a divided Congress, Biden has a 40% chance of winning. It is much less likely that Mr. Trump would win with a divided Congress and that Mr. Biden would win with full Democratic control, at 10% each.
The outlook for each of these four scenarios is as follows:
Biden won with a divided Congress. This is a status quo scenario, meaning that many things will remain the same. One of the biggest issues in the next president's term is that the 2017 personal tax cuts will expire at the end of 2025. If Congress does nothing, it will likely raise taxes because that would effectively amount to a tax increase for most Americans. Act in any situation. Biden wants all of those tax cuts to expire except for people making less than $400,000 a year, which would result in higher taxes on the wealthy. But if Biden wins a second term and Republicans control at least one chamber, they could block most or all of Biden's preferred tax increases.
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Biden's victory will give Democrats full control of Congress. If Democrats control both chambers next year and can use special rules to avoid a Senate filibuster, Mr. Biden could have his way with tax hikes. In addition to raising taxes on incomes above $400,000, Biden wants to raise the corporate tax rate from 21% to 28%. But he may not be in the running because he didn't get that vote during his first two years when Democrats controlled Congress. Given what Biden has already signed, other big bills are unlikely, but he could try again with smaller goals, such as making the child tax credit expansion permanent. .
President Trump wins with divided government. In terms of legislation, this could be similar to Biden's victory in divided government. Democrats will have some leverage to push for higher taxes on the wealthy as part of an extension of the 2017 tax cuts. Trump wants to cancel many of Biden's green energy incentives and has floated the idea of cutting Medicaid and even trying again to repeal the ACA. But Democrats could thwart him with just one chamber of Congress.
There are other actions President Trump may take that do not require Congressional approval. He wants to impose new tariffs of up to 60% on all Chinese imports and 10% on imports from other countries. He may impose them unilaterally. President Trump also vowed to launch a massive campaign to deport illegal immigrants and severely restrict border crossings. He will roll back many Biden-era energy, auto and banking regulations and will likely replace Fed Chairman Jerome Powell, but Fed policy will be one of the biggest factors in investment decisions. Given that this is often the case, there is the potential for market confusion.
President Trump wins; Republicans control Congress. A fully empowered Trump would likely seek to repeal many of Biden's green energy provisions and restore new funding aimed at modernizing the IRS and strengthening tax enforcement. He also has a good chance of extending all of the 2017 tax cuts. Republicans could pass Medicaid cuts and try again to repeal the Affordable Care Act, which currently provides health insurance to about 40 million Americans. A sizable Republican majority may be needed to pass some of these in Congress, as a minority of Republicans may not be in favor.
Therefore, for those willing to trade uncertainty for change in 2025, President Trump's trifecta would be the desired outcome of the 2024 election. Politically at least, the market's most sobering outlook is for Republicans to control at least one chamber and a second term for Biden. But that's only attractive if you like your current situation.
Rick Newman is a senior columnist in the United States. Yahoo Finance. Follow him on Twitter @rickjnewman.
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