Republicans Maintain Control Over the House of Representatives: Insights from Historical Stock Market Trends When the GOP Holds Power in Congress's Lower Chamber
Few events in 2024 sparked as much excitement among Wall Street and investors as Election Day. While not all laws drafted on Capitol Hill affect the stock market, those elected officials ultimately shape the fiscal policy that can directly impact the potential profits of corporations in America.
precipitously following polls being closed on Election Night, the Associated Press (AP) announced that former President Donald Trump had been elected the President of the United States, and the Republicans had seized control of the majority of seats in the Senate. At the time, the control of the House of Representatives remained uncertain.
On November 13, barely a week after the election, AP officially confirmed that the Republicans had secured enough seats to maintain their majority in the lower house of Congress. As of the evening of November 14, with eight House seats still under consideration, the GOP held 218 seats (the exact number needed to maintain a majority in the 435-seat House of Representatives), while the Democrats held 209 seats.
The GOP takes control of the lower house of Congress
Given that the Republicans now held a unified government (owning both houses of Congress and the White House), uncertainties persisted regarding the U.S. economy and American businesses. For instance, Trump advocated for a tariff-intensive policy aimed at promoting American-produced goods and making them more economically competitive with foreign imports. While import tariffs would theoretically level the playing field for American businesses, they posed a threat of raising consumer prices and damaging already strained trade negotiations with China. It was also possible that America's allies would retaliate with import tariffs of their own on American-made goods.
Wall Street might also be concerned about the country's escalating national debt. Traditionally, Republican policies favored lowering tax rates for individuals and businesses, which risked further widening the deficit.
The only assurance at hand was that personal and corporate income tax hikes would be off the table, given Donald Trump's looming arrival in the Oval Office and the GOP's control of both the upper and lower houses of Congress. Democratic Party presidential nominee Kamala Harris had advocated for increasing the corporate income tax rate by 33%.
The lowest corporate income tax rate in decades had played a significant role in driving share buyback activity on Wall Street. According to data from S&P Global, components of the S&P 500 (^GSPC 0.38%) had purchased over $7 trillion worth of their stock over the previous ten-year period (up to June 30, 2024), with an increase in buyback activity evident following the passage of Trump's flagship Tax Cuts and Jobs Act, which permanently lowered the corporate income tax rate from 35% to 21%.
The impact of a GOP-led House on stocks
However, the pressing concern for investors was: What impact would a GOP-led House have on stocks? History suggested that investors had every reason to be optimistic.
In a 2021 report, Integrity Wealth Management President and Forbes contributor Mike Patton analyzed the returns of the perpetual Dow Jones Industrial Average (^DJI -0.25%) since 1946 under various political situations. Patton discovered that, in instances where the Republicans held a majority of seats in the House of Representatives, the Dow Jones yielded an annual return of 10.7%. Compared to this, when Democrats controlled the House, the Dow provided a more modest 7% average annual return.
The same pattern emerged with a unified government. When the GOP was in charge of Congress, the Dow generated an average annual return of 8%, which was slightly higher than the 6.7% average annual return when Democrats controlled both houses of Congress.
However, this data only presented part of the story. No matter the political scenario chosen by American voters, the average annual return for the Dow Jones Industrial Average remained consistently positive – ranging between 6.3% and 12.9%, based on the scenarios examined by Patton.
Patton's findings were consistent with long-term investment cycle data.
It was now confirmed. A new bull market had started. The S&P 500 had surged 20% from its low on October 12, 2022. The preceding bear market had witnessed the index fall 25.4% over 282 days.
-- Bespoke (@bespokeinvest) June 8, 2023
The aforementioned data set was shared on social media platform X in June 2023 by the researchers at Bespoke Investment Group. It compared the length of all 27 bear and bull markets in the benchmark S&P 500 since the onset of the Great Depression in September 1929.
The central takeaway from Bespoke's 94 years worth of analysis was that investment cycles, like economic cycles, were not linear. Just as recessions were short-lived, so were bear markets. Since the Great Depression, the average S&P 500 bear market had persisted for only 286 calendar days, or roughly 9.5 months.
On the opposite side of the spectrum, a common S&P 500 bull market stretches out for approximately 1011 calendar days. Notably, 14 out of 27 such bullish periods, including the current one, surpass the duration of the longest S&P 500 bear market.
Regardless of the turmoil that might ensue due to adjustments in the gameboard of Washington, D.C., the annals of history demonstrate that those who practice patience on Wall Street are handsomely repaid with substantial rewards.
With the GOP's control of the House of Representatives, investors may be encouraged to allocate more funds towards long-term investments in the stock market. This is because historical data suggests that under Republican-controlled House majorities, the Dow Jones Industrial Average has often delivered higher annual returns compared to Democratic-controlled periods.
Given the potential for higher returns, those engaged in venture capital or private equity investments might find opportunities to invest in new businesses or projects that align with the Republican administration's policies, such as industries focused on infrastructure or technology. This could lead to a surge in investments in these sectors, opening up avenues for increased financial growth and returns.
