Economic Implications of a Republican Victory

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Economic Implications of a Republican Victory

Republicans have been setting the economic agenda since 2017.  Therefore, nearly everyone understands the current and proposed Republican economic policies. And in virtually every poll over the past four years, respondents say they trust President Trump and the Republicans to do a better job of managing the economy than Joe Biden and the Democrats. The President’s uphill battle to win a second term is defined by his personal style, the public’s need to blame “someone in power” for the COVID19 crisis, and the disruptive nature of his broader Make America Great Agenda.

In this segment, we’ll forecast what happens to stocks and the broader economy if President Trump holds the Presidency and Republicans keep control of the Senate.  We’ll also discuss the less likely scenario under which the Republicans sweep all three houses.

As of early October, the most likely outcome is that the Republicans hold the White House and Senate, while Democrats keep the House of Representatives.  The “wisdom of crowds” is reflected in the 56% to 40% spread Gallup reported October 1 between the share of people who expect Trump to win and the share who expect Biden to win.  However, a Democrat president with a Democrat House and Republican Senate is the second most likely scenario.  That is followed by a Republican sweep in third place.  Meanwhile, a Democrat sweep is in an unlikely fourth position.  And finally, either of the two remaining permutations is highly unlikely given the dynamics of specific elections at the state and district levels.   The rationale for this assessment was discussed briefly in trend #1.

The two most likely scenarios appeal to the Wall Street establishment far more than a sweep by either party.  According to David Kostin, chief equity strategist at Goldman Sachs, “A divided government scenario would lead to a smaller change in interest rates and a reduction in political uncertainty.”   His research team says that "such an outcome would be the best-case for the S&P 500, causing the index to rise 11% to 3,700 over the near-term and to 4,000 by mid-2021."  The Trends editors agree. 

Furthermore, according to the Goldman team, even an unlikely  “blue sweep” could not sink the economy; they say it would likely result in the S&P 500 climbing 1.93% to 3,400 in the short-term and to 3,800 by mid-2021.  As we’ll explain in trend #3, this medium-term outlook is plausible, but the longer-term outlook would likely be a return to the economic lethargy of the Obama years...

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