New President, same Congress

A perspective from E*TRADE Securities 11/08/20

After an intense campaign season, Joe Biden looks poised to become the 46th president of the United States, with the Associated Press Decision Desk now calling it a win for the former VP. 

Every four years, market volatility typically heats up as investors assess the potential impact of a new administration’s policies, and this year was no exception. Given the emotions surrounding the 2020 general election and hardships of the pandemic, having this election cycle in the rearview may provide some stability for markets after months of uncertainty. 

In the grander scheme of things, though, the outcome of this election is unlikely to affect the long-term performance of any well-balanced investment portfolio (more on that below). 

With Republicans potentially retaining control of the Senate and Democrats holding the House, a divided government reduces the odds of sweeping legislation—such as a new green deal, significant tax increases, or a major stimulus package. (The final count for Senate seats may not be confirmed until January.)

Nonetheless, the newfound clarity on the boss of the Oval Office and his congressional peers may affect the economy and markets in a few notable ways, presenting potential opportunities—and risks—for investors’ portfolios:

  • Gridlock may mean status quo: Biden’s campaign advocated for, among other things, a massive infrastructure overhaul, a sustainable economy, and an expansion of the Affordable Care Act. However, without the support of both chambers of Congress, the new president may face opposition when it comes to enacting future policy. Translation: Energy, infrastructure, and health care initiatives may be less likely to occur, or smaller in scale than anticipated. This may mean new headwinds—or tailwinds—for related industries.
  • Full-throated tax reform less likely: Biden’s proposed tax hikes also appear less likely to come to fruition under a divided government. But, in the event the administration does push through increases to corporate and top-tier tax rates, it’s possible the policy may be less onerous on large-cap stocks, particularly those that derive considerable income from overseas business. Also, potential tax increases for high earners could push investors toward municipal bonds, since they are typically exempt from federal taxes, and sometimes state and local taxes.
  • Stimulus may slim down: Lawmakers have gone in circles proposing various versions of a bill that may (or may not) include another round of direct payments to Americans, loans for small businesses, aid for ailing industries, and support for particularly hard-hit cities and states. Without a unified government, both parties will need to find middle ground, possibly resulting in a package with a smaller price tag.

For an in-depth look at election implications across asset classes, check out this analysis from our colleagues at Morgan Stanley,1 where you can also find more insight into the overall government election outcome.

Big picture

While presidential priorities may present unique opportunities and risks to consider over the next four years, investors shouldn’t lose sight of the bigger picture. After all, history suggests the stock market’s longer-term course is unlikely to be determined by the party affiliation of the sitting president. In fact, the market has generally followed an upward trajectory and delivered positive returns under both Democratic and Republican leaderships.

Price data source: FactSet Research Systems. Index launch date is March 1957, according to S&P Dow Jones Indices.

Bottom line

As with any presidential transition, especially from one party to the other, there may be some bumps in the road. When it comes to politics and investing, though, the best approach may be to tune out the noise. The tried-and-true strategy is to keep decisions mapped to personal timelines, goals, and risk tolerance.

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  1. E*TRADE Financial, LLC is a business of Morgan Stanley.

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