For much of the year, Wall Street has spent its time worrying about the impact of the unprecedented coronavirus disease 2019 (COVID-19) pandemic. All the while, we've watched the benchmark S&P 500 (^GSPC -0.22%) roar back from a bear market low, reached on March 23, to hit new all-time highs less than five months later.
Investors have also spent their time splitting hairs over the now-completed U.S. election. Now that former Vice President Joe Biden appears set to become President-Elect Joe Biden, the prevailing question is: "Would a Joe Biden-led White House lead to higher stock prices?"
What if I told you the answer was most likely yes, and that the S&P 500 could topple the 5,000-point threshold with Biden in the White House? Here's a closer look at all the variables that are poised to work in favor of investors with Joe Biden in the Oval Office.
Joe Biden speaking with reporters. Image source: Official White House Photo by Sharon Farmer.
No big-picture policy changes for many years to come
While it's quite common for all eyes to be on the presidential election, we sometimes overlook the importance of the legislative process that occurs in Congress. With votes still being tallied as I write, the House of Representatives will remain under the majority control of Democrats, while the Senate looks likely to be controlled by Republicans. In other words, a split Congress, just as we've been dealing with over the past two years.
Although Biden will have the liberty to issue executive orders as president, virtually all of his big-picture campaign promises would have no chance of becoming law. This includes reforming healthcare in the U.S., implementing sweeping climate change initiatives, and reversing some of the tax cuts implemented by President Trump via the Tax Cuts and Jobs Act (TCJA).
As you might recall, the TCJA reduced the peak marginal corporate tax rate from 35% to a nearly eight-decade low of 21%. Biden had proposed increasing corporate taxation back to 28% to raise additional federal revenue and tackle deficits that have ballooned due to the coronavirus pandemic. With a likely divided Congress, all corporate tax changes are now off the table.
Translation: Historically low corporate tax rates are here to stay. That means plenty of extra cash flow for share buybacks, dividends, business reinvestment, talent retention, and acquisitions.
Image source: Getty Images.
The Federal Reserve is keeping lending rates low, no matter what
A Biden presidency will also benefit from historically dovish monetary policy from the Federal Reserve.
Earlier this year, the nation's central bank lowered its federal funds target rate -- the target interest rate set by the Federal Open Market Committee that financial institutions pay or charge to borrow or lend their excess reserves -- to a record-tying low of 0% to 0.25%. Federal Reserve Chair Jerome Powell has made clear that the central bank has no intention of raising its federal funds before 2024.
Although the Fed doesn't directly control interest rates, its monetary actions, such as buying long-term bonds and reducing the fed funds rate, trickle into the U.S. economy and result in lower lending rates. A dovish Fed for at least three of Biden's four-year term in the Oval Office would mean historically low lending costs for businesses. We'd see lending used for acquisitions, innovation, business expansion, and possibly even capital-return programs. Apple, for example, has been utilizing historically low lending rates to borrow money to repurchase its own stock.
Image source: Getty Images.
Additional stimulus is on the table
Although big-picture reforms are going to be off the table with a divided Congress, Stimulus 2.0 remains very much on the table, even with talks between Republican and Democratic leaders failing to reach an agreement over the past three-plus months.
A loss in this election for President Trump gives him little incentive to push through a second stimulus package. At the very least, he's probably less willing to cede much ground in stimulus negotiations with House Speaker Nancy Pelosi (D-Calif.) over his remaining 10 weeks in office.
Tuesday evening's election results make it much likelier that if another round of stimulus is to be enacted, it's going to occur within the first few months of a Biden presidency. If you recall, the Democrat-led House had already come down on their stimulus request from well over $3 trillion to $2.2 trillion. Meanwhile, the Senate's initial offer of around $1 trillion had been increased by the White House to closer to $1.8 trillion. Both parties had narrowed a more than $2 trillion difference in their initial proposals down to roughly $400 billion not long before the election. It shouldn't be too difficult for both sides to find some common ground after Jan. 20, and that's going to be a positive for equities.
Image source: Getty Images.
The stock market has a history of outperforming other assets
Finally, history is on Biden's side, as well as that of investors.
Since 1945, there have been 13 presidents in the Oval Office. Only two -- Richard Nixon (R) and George W. Bush (R) -- have overseen a stock market decline. In the modern era, the stock market has risen for all six Democratic presidents, with an average annualized gain of 10.6%. That's actually more than double the average annualized return of 4.8% for Republican presidents over the same 75-year stretch.
The thing is, the stock market historically outperforms all other asset classes over the long run. The S&P 500, inclusive of dividend reinvestment, has averaged a 7% annual return over the very long term. This takes into account a double-digit correction about every two years, as well as a once-a-decade decline (on average) of 30% or more.
Since 1985, which is when we first began to see technology improving the dissemination of news to Wall Street and investors (i.e., leveling the playing the field), the S&P 500 has returned an even more robust 8.6% annually -- and this doesn't include dividends paid. If the S&P 500 were to simply maintain this average annual return during the Biden presidency, it would hit roughly 4,800.
But this isn't your run-of-the-mill new bull market. This is the perfect scenario for equities with historically low lending rates, clear fiscal visibility, and a strong likelihood of additional stimulus. That's a recipe for the S&P 500 to reach 5,000 during a Joe Biden presidency.
