Joe Biden is now the president-elect of the United States of America. Many voters are celebrating this victory, but on the other hand many are not (about 70 million Trump supporters). But the reality is that on January 20th, at noon, we will have a new president of the United States.
What does a Biden win mean for the economy? What does this mean for the stock market? These are all valid questions that deserve careful and thoughtful consideration.
What does the historical record tell us on how Democratic and Republican presidencies performed in terms of the economy and the stock market? Thankfully, there is some literature that can shed light on these questions.
When it comes to the economy, real gross domestic product (the primary measure of national output) has been higher during Democratic presidencies. In terms of the stock market, returns for the S&P 500 and other stock indices have performed better under Democratic presidencies. In fact, some of my own research shows this result (see, Perez Liston, Chong, and Bayram (2014)).
Of course, the fact that the stock market and the economy have all performed better under Democratic presidencies could just be luck (e.g., Bush did not create the financial crisis of 2008, just like Trump did not create the COVID recession; but we could very well argue that Trump did not respond appropriately to the crisis and as a result the economic hardship might last longer than expected). Or it could be the result of very deliberative economic policies by Democrats that have benefited all Americans. It is hard to know for certain which one of these explanations is true, or if both are true, or if none are true. But the data do show that the economy and the stock market have performed better under Democratic presidencies.
But what about the future? What do analysts expect for the economy under a Biden administration? A recent report by Moody’s conducted a forecasting study and found that a Biden administration would perform better than a Trump administration. But the performance of his administration would be heavily contingent on whether Democrats win the senate; but even without the senate, Biden would still perform better. Furthermore, Goldman Sachs also conducted a study and found that a Biden administration would perform better.
Biden does not take office until January, which means we still have more than two months to go. The explosion in COVID cases across the country and across the world represent a significant threat to the American economy in the short term. As I write this article, Republican and Democratic led states, and cities (e.g., Utah and Chicago) are announcing new restrictive measures that are sure to lower economic output in the short run.
In summary, there is reasonable evidence to believe that a Biden administration could be good for the economy and the stock market. Of course, no one has a magic crystal ball, and we cannot perfectly predict the future using the past. But if past is prologue, Americans could stand to benefit from a Biden administration.
By: Dr. Daniel Perez