It’s Election Day 2020. Naturally, the question on the top of everyone’s mind is: Who is going to win? President Donald Trump, or former Vice President Joe Biden? But, as investors, we are asking a slightly different question: Who is going to be better for the stock market? Trump or Biden?

Interestingly enough, as I write this, stocks are having a blockbuster day. All the major indices — the Dow Jones, S&P 500 and Nasdaq — are up about 2%. Biden has been favored in the polls. One could connect those dots, and say that Wall Street is bullish on a Biden victory.

But is that so? Will Biden actually be better for the stock market? After all, aren’t Trump’s policies more business friendly?

Let’s answer all those questions right now, so that you’re prepared to invest once a winner is announced.

History Says Democrats Are Better for the Market

Let’s start this discussion by asking a simple question: over the past 70 years, who has been better for the economy and the market? Democratic presidents? Or Republican presidents?

While I understand that this question is oversimplified — each candidate is different, party lines change over time and how much a president accomplishes in office strongly depends on who controls the House and Senate — the answer still does give us good context for judging whether Biden or Trump will be better for the market.

So which party has historically been better for the market and the economy?

Democrats. By a significant margin.
Click to Enlarge

My independent analysis of broad economic and stock market success metrics indicates that, since 1948 (post-WW2), Democrat presidents outperformed Republican presidents, on average. Consider the following:

• Democratic presidents average 1.6X higher annualized real GDP Growth.
• Democratic presidents also average higher real median income growth (1.1%, to 0.2%).
• The unemployment rate has historically been lower under Democratic presidents (5.5%) than under Republican presidents (6%).
• The stock market performs better under Democratic presidents, averaging ~12% annual returns, versus 7% for Republican presidents.

This does not answer our question of who will be better for the market, given the discrete differences between candidates that I mentioned earlier. But it does give us some important context for answering the question, and loosely implies that Biden will be better for the stock market.

The Incumbent Advantage Is Real, Too

While broad-stroke historical returns imply that Biden will be better for the market, there are certain historical metrics that imply that a Trump victory will be better for the stock market.

For starters, Republican victories tend to lead to more significant near-term outperformance in the markets. That is, in the few months after the election — November to February — the S&P 500 has historically rallied more following a Republican victory than a Democratic victory (although that same analysis does show that Democratic victories lead to better performance in a 12 month window).

Even further, incumbent victories also lead to more significant near-term outperformance. Since 1928, when the incumbent won the election, the S&P 500 averaged a 4.8% return over the following 12 months, while the market averaged a 2.5% loss when the incumbent lost.

So, history says Democrat presidents are better for the market in a multi-year window, but incumbent presidents are better for the market in a 12-month window.

To that end, one could loosely say that a Trump victory is more bullish for the next 12 months, while a Biden victory is more bullish for the next 4 years.

How About Those Higher Taxes?

One of the big talking points with respect to these two presidents and economic/market performance is taxes.

Specifically, Trump’s platform features lower corporate taxes, which is presumably better for the economy and markets because it provides a tangible boost to corporate earnings. Biden’s platform, meanwhile, proposes to lift the corporate tax rate, which is presumably bad for the economy and markets because it tangibly dampens corporate earnings.

As go earnings, so go stocks. Therefore, the simple analysis here is that Trump is better for the stock market because his platform will lead to higher corporate earnings.

That feels right to me. Lower corporate taxes equals higher corporate earnings equals higher stock prices.

But we have to contextualize that with two important notes:

1. For better or worse, President Trump injects a lot of noise into the markets via geopolitical tensions, trade wars and tariffs. Biden likely will remove that noise. With that noise removed, the global economic landscape will have more clarity and cohesion — two things which investors will likely reward with a higher earnings multiple. That higher earnings multiple could theoretically offset lower corporate earnings.
2. Also for better or worse, Biden is inheriting a struggling economy, with high unemployment and tons of struggling businesses. He won’t raise taxes against that backdrop. Indeed, he won’t raise taxes until the economy is on 100% sure footing again, with full employment. Given some of the permanent lifestyle changes that Covid-19 had induced — reduced foot traffic to restaurants and retail stores, reduced corporate travel, etc — it may take a few years before the economy gets back to full employment. By that time, Biden may be on his way out of the White House, meaning that the higher taxes innate to Biden’s platform may not actually materialize.

So, when it comes to the taxes argument, it feels like a wash between Trump and Biden. If Biden does actually get around to raising taxes, a Trump presidency will likely end up being better for the market. But if Biden doesn’t get around to it — which he may not — then a Biden president will end up being better because you’ll have the same earnings power with a higher earnings multiple.

Who Is Better for the Stock Market?

To be frank, I think it’s six of one and half a dozen of the other.

With Trump, you’ll get lower taxes, higher earnings and more business-friendly policies. But you will also get less stimulus and continued escalating geopolitical tensions.

With Biden, you’ll get higher taxes, lower earnings and less business-friendly policies. But you will also get more stimulus and de-escalation of geopolitical tensions.

It really is six of one, half a dozen of the other.

Of course, certain parts of the market will perform much better under Trump. Certain parts will perform much better under Biden. But, as a whole, the stock market will be just fine under either.

The stock market doesn’t really care who wins. Wall Street just wants a clear winner.

Why Is the Market Rallying?

The stock market is rallying big on Election Day because Wall Street increasingly believes that the election results will be definitive, and we will get a clear winner.

The market hates uncertainty. So, the worst outcome of this election would be a narrow victory, followed by the losing party contesting the election, which would be followed by recounts and court cases that would drag on for weeks — leaving the American people (and the stock market) hanging in suspense.

The market also believes that in the event of a narrow victory, Trump will contest the results, while Biden won’t.

Therefore — because the market likes Trump’s lower taxes but also likes Biden’s stimulus plans — there are two ideal outcomes for the market: Either a narrow Trump victory, or a landslide Biden victory.

Bottom Line on Election Day 2020

Investors are voting with their wallets on Election Day, and saying that the two outcomes which the market would be fine with, are the two most likely outcomes. If we get either, I’m sure the stock market will be just fine in the coming weeks and months.

But if it’s a narrow Biden victory followed by Trump contesting the results — well, that’s a recipe for a stock market sell-off in November.