by Guest Author
There are four possible post-2020 election outcome scenarios which will determine the direction
of the US stock market through November 2022:
- Republican President/Republican Senate/ Democrat House
- Republican President/Democrat Senate/ Democrat House
- Democrat President/Democrat Senate/Democrat House
- Democrat President/Republican Senate/ Democrat House
The election outcome long term rankings in the table below assume that additional stimulus will result in the interest rates or the yield for 10-year US Treasury bond to be relatively higher. Higher interest rates reduce economic growth and stock PE multiples. Conversely, I based the short-term rankings on the stimulus or the degree of to be added or not.
The long-term rankings cover the two years through the 2022 midterm Congressional elections. The short-term rankings cover the period beginning November 4, 2020, and ending with the 2021 Presidential inauguration.
The Four Outcomes
1. The best long-term and worst short-term outcome for the stock market would be for Biden to be elected President and for the Senate to maintain its Republican majority for two reasons:
- A Republican Senate would increase the probability of there being no additional stimulus.
- Republican Senate would not vote for an increase in income tax rates for corporations or individuals.
2. Alternatively, the second-best long-term and third-worst short-term outcome for the stock market would be the re-election of President Trump and the Senate to maintain its republican majority for two reasons:
- A Republican Senate would likely result in less stimulus.
- No increase in income tax rates for corporations or individuals.
3. The third best long-term and second-best short-term outcome for the stock market would be the re-election of President Trump and for Senate to become a Democrat majority for two reasons:
- A much larger stimulus would be passed.
- Trump Administration would not have the ability to continue to deregulate.
4. The worst long-term and best short-term outcome for the market would be a sweep by the democrats since this would result in:
- The largest amount of stimulus
- Significant increases in ordinary income and long-term capital gains tax rates
The Charts
Regardless of which of the four election outcomes occur, stocks in the US will remain in a secular bear market or steady downtrend, which began in February 2020, through at least 2028. A 4th secular bear market since 1929 began after the aggregate valuation of the 30 Dow stocks to GDP increased reached as high as 132% in early 2020. Also, the two prior bulls had ratios of 116% and 123% at their peaks.
The chart below depicts the Dow to GDP ratios at the secular bear market bottoms.
Also, the next chart below depicts the durations and percentage declines for the past three secular bears.
The chart below depicts an exponential increase in US government debt to an all-time high in early 2020. The chart also illustrates the spikes in ordinary income tax rates, which followed the debt spikes during the first 40 years of the 20th Century. Regardless of which of the election outcome scenarios win out, both political parties will have no choice but to raise the income tax rates for the foreseeable future.
