What Happens to the Economy and Markets After the Election?

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.

These plans will be stymied if Congress remains split between the two parties, although there may be a deal on more infrastructure and social spending in exchange for some tax cuts targeted to middle-income households, according to the report.

Biden would also reverse Trump's policies on foreign trade and immigration, which would also boost growth, according to the Moody's economists, and he could use executive orders to make those changes if Congress remains split. The primary beneficiaries of Biden's economic plans: low- and middle-income households.

Trump's Plans

Trump, in contrast, plans to cut spending by $700 billion over the coming decade and substantially cut taxes. Health care would bear the brunt of those spending cuts, including cuts in Medicaid and Medicare payment programs, as well supplemental food assistance, disability and student loan programs.

He's also expected to make permanent the individual income tax cuts of the 2017 Tax Cuts and Jobs Act that are set to expire after 2025 (the legislation's corporate tax cuts are already permanent) and "double down on the foreign trade and immigration policies he pursued in his first term," including a renewed trade war with China.

Trade tariffs have "acted like a tax increase on the U.S. economy, hurting U.S. manufacturers, transportation companies, and farmers in particular," and "a highly restrictive foreign immigration policy … is a significant impediment to longer-term economic growth, as it slows growth in both the labor force … and labor productivity." The primary beneficiaries of Trump's policies: households with higher incomes and net worth.

"Trump and Biden could not have more different governing approaches and policies, and this is especially true when it comes to economic policy," write Zandi and Yaros. But they expect only "modest differences in policy" if Congress remains split, no matter who wins the presidency.

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