What Happens to the Economy and Markets After the Election?

Photo: Stefani Reynolds/CNP/Bloomberg

It’s a question many investors and their advisors may be asking, and the answer, of course, depends on who wins the presidency and what happens in congressional races. Does one party gain control of the White House and Congress or does Congress remain split, with the Democrats in charge of the House and Republicans on top in the Senate?

With that context in mind, Moody’s Analytics Chief Economist Mark Zandi and Economist Bernard Yaros studied four scenarios for the upcoming election: a Democratic sweep of the presidency and the Congress, a Republican sweep of all three and two split-government scenarios: Democrats taking the presidency and retaining control of the House but Republicans keeping the Senate, and Republicans taking the presidency and keeping control of the Senate while Democrats remain in charge of the House — the status quo.

The economists give different odds for each scenario: 40% for a Biden win with Senate and House party leadership unchanged — their base case scenario — and 35% odds for a Trump victory and all else unchanged. Odds of a Democratic sweep of the White House and Congress are 20%; odds of a Republican sweep, 5%. 

Zandi and Yaros then project the long-term economic impact of each presidential candidate’s policy proposals, based on what is known currently and the assumption that whoever wins will start to implement policy changes soon after taking office while their overall policies continue through the remainder of the decade. It’s similar to the long-term time horizon that the Congressional Budget Office uses for this projection of budget and policy analysis. 

The projections also assume that the Federal Reserve Board remains committed to near zero short-term rates until the economy reaches full employment and the inflation rate consistently tops the central bank’s 2% inflation target — the basis of the Fed’s newly tweaked framework for monetary policy — and that the COVID-19 pandemic winds down as an effective vaccine begins to be distributed widely soon after the presidential inauguration.

As the chart below shows, in almost all major categories a Democratic sweep of the White House and Congress shows the strongest results — for GDP, job and corporate profit growth along with stock market performance. The debt-to-GDP ratio, however, is highest for that scenario, soaring to 120.9% by the end of the 2020-2030 decade. 

In contrast, a Republican Sweep of the three branches of the federal government and the continued status quo of Republicans in charge of the White House and Senate show the worst results, except for the debt-to-GDP ratio. The ratio is lowest for the 2020-2024 period under the status quo scenario.

The major differences between the various scenarios: government spending plans and trade and immigration policies, which are most pronounced if one political party takes control of all three government branches.

Biden’s Economic Plans

Biden plans to add $7.3 trillion in government spending over the next decade on infrastructure, education and the social safety net including Social Security, housing and healthcare, according to the Moody’s Analytics report. He would finance more than half of the additional spending by raising taxes on corporations and wealthy individuals, but those economic costs would be “more than offset by the stronger economic growth as the supply of labor and capital expand,” according to the Moody’s Analytics report.