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2020 Part Deux 

Two boxing gloves, one blue and one red, colliding in front of a stylized american flag, symbolizing political conflict or debate.

This year, the United States faces a rematch of the 2020 elections between current President Biden and former President Donald Trump. We will all witness a lot of rhetoric in the news, but the political risk for capital markets will be low. That happens because no President or politician running for re-election wants to upset voters by allowing new legislation to pass that might hurt their chances at re-election. The bonus is that it helps the stock market have great odds for a nicely positive year. Let me explain…

When you break down the four years a US President is in office, you will see that, on average, the inaugural years have positive S&P 500 returns 60% of the time, the second years in office are also only positive 60% of the time, but the third years in office are positive a healthy 92% of the time, and the fourth years are positive 83% of the time.

Those third and fourth years of a US President’s term tend to be the strongest for US equity markets—not always, but often. The higher-than-average positive performance is because politicians tend not to pass many new legislative actions before re-election in case they alienate centrist voters or lose a key issue for campaigning and fundraising. Hence, election years are usually good for equities. Interestingly, the negative calendar years in the fourth year of a President’s term tend to be during significant global recessions (1932, 1940, 2000, and 2008), and the likelihood of global recession this year seems extremely low.

Furthermore, US market performance is generally less positive in inaugurals because legislative risk is at its highest when the President introduces their new agenda and has a lot of political capital. But in 2025, I am more optimistic for market returns than historical odds show because US politics has become more polarized over the last several years and is structurally moving towards greater gridlock, and gridlock is good for markets.

The gridlock phenomenon is active in the Senate seats up for election in 2024. This year, the seats are well structured for the Republicans because several Democrats are defending their seats in states that historically vote Republican. That doesn’t mean the seats WILL go Republican, but there is a high probability in West Virginia, Montana, and Ohio, which have Democrat Senators up for re-election. Trump is doing well in those three states, which in turn hurts Democrat Senators who are trying to gain ground. This “Trump strength” might allow Republicans to gain a few seats in the Senate and eke out a small majority. On the other hand, it looks likely Democrats will take the House of Representatives, which will create gridlock by splitting the Houses of Congress.

November seems set to pit current President Joe Biden against former President Donald Trump, but this isn’t guaranteed. President Biden’s health and unpopularity could still spur a realistic challenge, albeit no one is currently emerging, and the odds are low. Former President Trump’s legal issues and comportment could redirect many Republican primary voters to a competitor. Especially if a strong third-party candidate emerges and then siphons votes from either main-party candidate. Unfortunately, the longer we go without changes or a Trump felony charge, the likelier a Trump/Biden contest becomes.

This situation has people on both sides unhappy. Polls show voters in both parties prefer an alternative candidate but only like the available names a little. Additionally, fatigue and annoyance could hit sentiment over the next six months, potentially causing volatility in the stock markets—even a pullback or correction. But eventually, there will be a winner, and sentiment will unite more around them, regardless of how much voters disliked them earlier in the campaign. The present headwinds will flip to tailwinds.

While we don’t know who will win, it’s reasonably clear how the Electoral College will need to play out. To win, the Democratic candidate likely needs a three-point plus popular vote margin—the typical spread to translate a popular vote win into an electoral college victory. Democrats’ lopsided support in high-population California and New York gives them a natural popular vote edge. A three-plus point national margin would probably win enough electoral votes in swing states to get to 270.

Although, if national polls are within the margin of error, the Republican candidate could have a strong chance of winning. However, polls may be of little help because they emphasize “likely voters.” Folks who don’t usually vote have determined who they think both candidates are after seeing each President in office. They might be likelier to vote this year—potentially making non-likely voters the swing factor if they are underweighted or excluded in polls, their influence won’t show.

So, look forward to a US election year featuring heavy gridlock, extending the status quo that almost always follows midterm elections, and providing traditionally nice equity returns.

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