When the 2020 election is finally over, it will likely have major implications for the stock market. But the outcome may not be in the way you may think.
If either Republicans or Democrats win total control of White House, Senate and House of Representatives, that can limit gridlock in Washington and allow the government to accomplish more. But that outcome may not necessarily be good for traders.
The stock market generally performs better under a divided government, according to the investment bank Goldman Sachs.
Stock-market returns during periods of a divided federal government have “typically exceeded returns achieved when one political party controls the White House, Senate, and House of Representatives,” David Kostin, chief U.S. equity strategist at Goldman Sachs, wrote in his 2020 outlook.
Since 1928, the S&P 500 has averaged a 12-month return of 11 percent when the election resulted in a divided government and 8 percent when a unified government was voted in.
At the time of Goldman’s report, PredictIt, which forecasts market and political events, assigned a 74 percent probability to Democrats retaining control of the House in 2020, a 54 percent chance to the party winning the White House and just a 35 percent to its capturing the Senate.
Kostin expects the S&P 500 will climb more than 8 percent from current levels to 3,400 by the end of next year, but says that a unified government could lead the benchmark index to fall almost 17 percent to 2,600.
“The bull market in U.S. equities will celebrate its 11th anniversary in 2020,” Kostin wrote. “A durable profit cycle and continued economic expansion will lift the S&P 500 index by 5 percent to 3,250 in early 2020. However, rising political and policy uncertainty will keep the index range-bound for most of next year.”