Statistically, investors have plenty of reason to be hopeful.
There’s arguably no event Wall Street awaited more in 2024 than Election Day. While certain aspects of the legislative process have nothing to do with what goes on in corporate America, the candidates voters elect ultimately shape the fiscal policy that affects businesses and impacts Wall Street.
In the late-evening hours of Nov. 5, the Associated Press (AP) was able to determine that Republicans had flipped enough seats in the Senate to reclaim a majority in the upper house of Congress. When the votes were tallied, Republicans came away from with a 53-to-47-seat majority.
Just hours after the Senate had been called for the GOP, AP had enough evidence from swing states to declare former President Donald Trump as the new president-elect. Trump eventually secured 312 electoral votes to Democratic Party presidential nominee Kamala Harris’ 226.
Lastly, eight days after polls closed, on Nov. 13, AP determined that Republicans had won enough seats in the House of Representatives to maintain their majority. Though there are still three seats left to be called at the time of this writing on Nov. 21, the GOP holds a 219 to 213 majority in Congress’ lower house.
President Trump giving remarks to a crowd. Image source: Official White House Photo by Joyce. N. Boghosian.
The GOP takes control: Here’s what we know, as of now
Although Wall Street and investors finally have some clarity on what the incoming administration will look like, there are still far more questions than answers when it comes to the U.S. economy and stock market.
Perhaps the most highlighted of all concerns with Trump back in the Oval Office is what might happen with foreign trade. During his campaign, Trump lobbied for a whopping 60% tariff on Chinese goods imported into the U.S., with a potential tariff of up to 20% on all other countries.
On paper, tariffs are designed to make American goods more price-competitive, as well as encourage domestic production. However, there’s the potential for trade wars to develop that result in other countries, including America’s allies, imposing import tariffs of their own. Eventually, it might lead to higher costs for businesses and consumers.
Another big question that’ll need to be answered is how the unified Republican government plans to tackle our country’s rapidly rising national debt. With the exception of 1998 through 2001, the federal government has spent more than it’s brought in every year since 1970. The magnitude of these federal deficits has noticeably grown in recent years. With the GOP traditionally favoring lower personal and corporate income tax rates, it’s not yet clear if we’ll see meaningful improvement in the federal deficit in the years to come.
Perhaps the one thing we do know is that any chatter about increasing the corporate income tax rate, which had been proposed by Harris during her campaign, is now firmly off the table.
Additionally, individual income tax rate cuts, which were put into place with Trump’s flagship Tax Cuts and Jobs Act, are going to sunset on Dec. 31, 2025. A GOP-led federal government could make it easier to extend these cuts, or potentially make them permanent.
Image source: Getty Images.
Here’s what happens to stocks when Republicans have a unified government
But the biggest question of all, at least for the investing community, is: What does a Republican-led government mean for stocks? Statistically, the answer should give investors reason to be hopeful.
Recently, online education platform Retirement Researcher released a report (“Are Republicans or Democrats Better for the Stock Market?”) that analyzed the performance of the benchmark S&P 500 (^GSPC 0.35%) under a variety of political scenarios over a span of nearly a century (1926 through 2023).
During the 98 years Retirement Researcher examined, the least frequent of all situations was a Republican unified government. But during the 13 years this occurred, the S&P 500 averaged a scorching-hot annual return of 14.52%. On a compound basis, a return of this magnitude can double an investor’s money every five years.
While this data presents plenty of reason for optimism on Wall Street, it’s only telling half the story. The truth is that all of the arrangements studied by Retirement Researcher produced hearty average annual returns in the S&P 500 since 1926:
- Unified Republican: 14.52% average annual return over 13 years.
- Unified Democrat: 14.01% average annual return over 36 years.
- Divided with Republican president: 7.33% average annual return over 34 years.
- Divided with Democratic president: 16.63% average annual return over 15 years.
No matter what happened on Election Day, investors were set up for success.
^SPX data by YCharts.
But we can take this one step further for patient investors with a long-term mindset.
Every year, the analysts at Crestmont Research update a published data set that examines the rolling 20-year total returns, including dividends, of the broad-based S&P 500 dating back to 1900. Even though the S&P didn’t exist until 1923, researchers were able to track its components in other indexes, allowing for back-testing to the start of the 20th century. This yielded 105 rolling 20-year periods of performance data (1919 through 2023).
What Crestmont found was that all 105 rolling 20-year periods produced a positive annualized total return. In plain English, if you had, hypothetically, purchased an S&P 500 tracking index at any point since 1900 and held that position for 20 years, you would have made money every single time. Regardless of whether a depression or other shock event occurred, a 20-year holding period in an S&P 500-tracking index would have generated a positive annualized return 100% of the time.
Additionally, more than 50 of these rolling 20-year periods produced an annualized total return of at least 9%, which would double investor’s money every eight years. This is to say that investors didn’t just scrape out a gain now and then. More often than not, being patient, regardless of which political party was in charge on Capitol Hill, led to game-changing returns.
Even with questions left to answer for the incoming administration, long-term investors are well positioned for success.
