With the presidential election in less than three weeks, you may be wondering about the impact the result will have on stocks.
To some extent, the election outcome doesn’t matter. The S&P 500 has risen in 39 of the past 50 years, generating an average annual return of 11.9%, including dividends.
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So, if history repeats itself, stocks should do well for whoever wins the presidency. To be sure, the market has done better with Democratic presidents than Republican ones.
According to Ned Davis Research, from 1901 to 2024, the Dow Jones Industrial Average climbed an annualized 8.2% under Democratic presidents and 3.2% under Republican administrations.
Perhaps that means Democratic presidents have implemented superior economic policy compared to Republicans. But it seems likely to me that much of the difference is random.
What Congress means for stocks
The makeup of Congress shows the opposite result. With a Democratic-controlled Congress, the DJIA has gained an annualized 1.1% when adjusted for inflation. However, with a Republican Congress, the increase is 6.5%.
Again, I think the results are more random than a reflection of the superior economic policy passed by GOP-led Congresses.
Looking at the current market environment, some experts say a Trump victory has already been priced into the strong stock market. They think he would implement business-friendly policies that are good for stocks.
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The betting odds of Trump becoming president have risen to 56%, according to data from several sources cited by JPMorgan Chase.
Meanwhile, the odds of a GOP majority in the Senate have risen above 80%, and the odds of a Democratic House have slid from over 60% to around 55%.
JPMorgan’s take on the election, stocks
“The rising probability of a Republican sweep is seen in the market moves over the past two weeks,” Nikolaos Panigirtzoglou, managing director for global market strategy at JPMorgan, wrote in a commentary.
Those moves include stronger stocks, particularly bank stocks, a stronger dollar, and higher U.S. bond yields.
But market levels don’t imply as high a probability of a Republican presidency/Congress sweep as the 45% probability implied by betting markets, he said.
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Renowned investor Stanley Druckenmiller, an ex-colleague of hedge fund legend George Soros, also thinks the stock market has accounted for a Trump victory.
“You can see it in the bank stocks, you can see it in crypto,” he told Bloomberg in an interview. The KBW Nasdaq Bank (stock) Index has jumped 10% in the last month, and bitcoin has appreciated 9%.
Druckenmiller sees potential trouble for stocks
A Democratic sweep would likely be bad for stocks, putting the market under pressure for three to six months, said Druckenmiller, who heads his Duquesne Family Office.
“The math of taxes, [lower] business confidence, lack of animal spirits in the business industry, no change on the regulation front, you would have a rough time for equities.”
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But he thinks that scenario is highly unlikely, with Republicans favored to win the Senate.
A Republican sweep is more possible. If it happens, “you get animal spirits, deregulation, so the economy could be stronger for three to six months,” he said.
But, “you would probably get a bad response in the fixed income markets, which could snuff out the equity rally.”
A bad response in the bond market means higher interest rates. Higher rates hurt the economy and, thus, corporate earnings.
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