Will stocks plummet if Donald Trump wins and Congress is divided? Here’s what history says about stock market returns in this scenario.

In just over five months, Americans will go to the polls or mail in their ballots to determine the direction our country heads in the next four years.

While there are many aspects of the legislation that have absolutely nothing to do with what is happening on Wall Street or with corporate America, there is no denying that the changes in fiscal policy were made on Capitol Hill. can influence what happens to the US economy and the stock market.

With the Republican National Convention less than two months away, former President Donald Trump appears to have walked away with the presidential nomination. As of May 21, Trump had secured 2,181 delegates, almost twice as many as the 1,215 delegates needed to clinch his party’s nomination.

During Trump’s first term as president (January 20, 2017 – January 19, 2021), the timeless Dow Jones Industrial Average (DJINDICES: ^DJI), broad base S&P500 (SNPINDEX: ^GSPC), and driven by growth Nasdaq Composite (NASDAQINDEX: ^IXIC) delivered gains of 56%, 67% and an eye-popping 138% respectively!

However, stock market returns under Trump were quite different between his first two years in the Oval Office, where he enjoyed a unified Republican Congress, and his last two years, when Democrats controlled the House of Representatives and Republicans controlled the Senate.

Would a Donald Trump victory in November, combined with a divided Congress, send the stock market into disaster? Let’s take a closer look at what challenges a Trump presidency and a divided Congress could face, and let history be the ultimate judge of what’s to come.

Will stocks plummet after a Trump victory and a divided Congress?

To be honest, there isn’t a single predictive data point on the planet that can guarantee what Wall Street will do based on who becomes president and whether Congress is divided or united. Yes, there are some very clear headwinds ahead. Some of these may be policy-based, while others threaten the Dow Jones, S&P 500 and Nasdaq Composite regardless of who is sworn in on January 20, 2025.

On the policy front, Trump and the Democratic-controlled part of Congress would likely feud over a number of issues. The most important thing for Wall Street would be taxation (both personal and corporate).

Arguably the most memorable law passed during Trump’s presidency was the Tax Cuts and Jobs Act (TCJA), which lowered personal income tax rates and created a flat corporate tax rate of 21% (from 35%). While Trump would likely push for a continuation of the TCJA tariffs, which are on track to disappear on December 31, 2025, Democrats are unlikely to support such a move given the country’s rising national debt and persistent budget deficit. Keep in mind that changes to the corporate tax rate are permanent (i.e. they won’t go away after 2025).

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The prospect of an increase in personal tax rates is worrying. If consumers have less disposable income, there is a real possibility that this could negatively impact the growth prospects of the fastest-growing companies on Wall Street.

But macroeconomic headwinds, which say nothing about who will win in November, could pose an even bigger threat to Wall Street than any policy-based wrangling between Trump and Democrats in Congress.

A perfect example is what has happened to the US M2 money supply over the past two years. The M2 money supply takes into account everything in M1, namely cash, coins, and demand deposits in a bank account, and adds savings accounts, money market accounts, and certificates of deposit (CD) under $100,000.

Most investors and economists pay little attention to the money supply because it has been rising without interruption for almost nine decades. A growing economy needs more capital in circulation to keep the proverbial hamster at the wheel.

However, since April 2022, we have witnessed a historic decline in the M2. After peaking at $21.722 trillion in April 2022, M2 has fallen by $881 billion, as shown in the April 2024 update from the Federal Reserve Board of Governors. While this overall decline of 4.06% is not all that impressive considering that the M2 grew at a record 26% annualized during the height of the COVID-19 pandemic, it nevertheless represents the first notable decline in the economy. decline of more than 2% in M2 since the Great Depression.

As you can see in the post on unbelievable rare. Testing back to 1870, there have only been five examples of meaningful M2 declines: 1878, 1893, 1921, 1931-1933, and 2023. All four of these previous M2 declines were accompanied by an economic depression and high unemployment.

The good news for whichever president wins in November is that the Federal Reserve and the federal government have the resources and insight to reverse the sharp declines in the U.S. economy that occurred in the late 1900s and early 2000s. century. Nevertheless, M2’s declining money supply has historically been a harbinger of a major decline in the US economy and stock market.

In other words, there’s always a chance that stocks could plummet if Trump and Congress are divided.

This is what history says happens when Republicans win the presidency and Congress is divided

With the understanding that Donald Trump and a split Congress will undoubtedly face challenges, let’s dig into the meat and potatoes and see what history has to say about stock market returns when Republicans win the presidency and Congress is divided.

Let’s start with the best news of all: No matter how you arrange the pieces of the puzzle, regarding which party controls the White House and whether Congress is united or divided, the stock market has delivered positive average annual returns under current conditions. each scenario.

According to calculations by Forbes’ columnist and chairman of Integrity Wealth Management Mike Patton, a “split Congress,” regardless of which party controls the White House, has delivered the most robust returns for investors of any scenario between 1946 and 2020. When the leadership of Congress was divided over this Over a period of 75 years, the Dow Jones achieved an average annual return of 12.9%!

The retirement-focused website Retirement Researcher went even further and examined the annualized returns of the S&P 500 from 1926 through 2023. What Retirement Researcher found was 34 years of a Republican president and a split Congress. During these years, the S&P 500 averaged an annual return of 7.33%. Interestingly, this is less than half the average annual return of 16.63% under a Democrat as president with a divided Congress.

Nevertheless, the point remains the same: a Republican president and a divided Congress historically lead to decisively positive returns for investors.

Although the stock market and the U.S. economy are not connected, a growing economy generally has a positive impact on American business.

There have been a dozen recessions since the end of World War II. Of these twelve recessions, nine were resolved within a year, while the remaining three did not exceed eighteen months in duration. By comparison, most periods of economic expansion lasted several years, occasionally reaching the ten-year mark. The economic cycle is not linear, and that undeniably benefits the Dow Jones, the S&P 500 and the Nasdaq Composite.

As you can clearly see in the post on X from researchers at Bespoke Investment Group, disproportionately long periods of economic growth translate into prolonged bull market rallies on Wall Street. Since the Great Depression began in September 1929, the average bear market in the S&P 500 has lasted just 286 calendar days. Meanwhile, the typical bull market hovers around 1,011 calendar days, or about 3.5 times as long.

Furthermore, 13 of the 27 bull markets in the S&P 500 over the past 94 years lasted longer than the longest bear market in more than nine decades.

While a stock market decline is a possibility if Trump wins in November and Congress remains divided, history shows that long-term investors will do well no matter what happens this election season.

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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has one disclosure policy.

Will stocks plummet if Donald Trump wins and Congress is divided? Here’s what history says about stock market returns in this scenario. was originally published by The Motley Fool