To forecast what the stock market might do in 2021, you could analyze a new president’s economic policy agenda. Or you could look at history. Since 1949—the start of the modern stock market era—when a president of one political party is replaced by a president of the other major party, the S&P 500 Index has averaged a gain of 2.3% in the new president’s first year, versus a gain of 11.6% when an incumbent party retains the White House. In part, that reflects the stock market’s uncertainty about the new president’s policies.
When the new other-party president has been a Democrat, however, just once in four administrations was there a negative first-year return—a drop of 11.5% for Jimmy Carter. Overall, under new Democratic presidents following Republican presidents, markets averaged a gain of 10.6% in the first year. That’s because Democrats have tended to come to power following periods of economic woes leading to recoveries. In contrast, when the other-party president has been a Republican, the market posted negative returns four out of five times. That’s because Republicans often regained the White House after foreign entanglements initiated by Democrats, creating economic uncertainty and market volatility.
Another influential factor: The division of power between the White House and Congress, which won’t be known until Senate runoff elections in Georgia on January 5. From 1949 through 2019, in years when the White House and both the Senate and House have been controlled by Democrats, the average Dow Jones Industrial Average return was just 7.4%. With a Democratic president and split Congress, 11.7%…a Democratic president and Republican Congress, 16.4%. Reason: Investors prefer the gridlock of divided government because major policy shifts are much less likely.