Midterm elections are less than 100 days away, and we will soon be in the thick of another season of electioneering. Each party will be
telling lying to us about how much better they are for the economy.
History, however, tells another story.
It turns out that a moderate centrist government is what works best for the markets. Ideally, a divided government — where one or both houses of Congress and the White House are controlled by the opposition party — creates an environment where stocks can flourish.
My thesis is that a divided government forces both parties to the middle, controls deficits and cuts taxes. The present all GOP rule is surprisingly reminscent of the Democrat control of Congress with a Democratic President: in each instance, fiscal prudence ent out the door, and foreign policy ventures were fairly disastrous.
The Democrats "Taxed & Spent," while the Republicans "Borrowed & Spent." Neither instance was good for equities.
Is there support for these statements?
Yes, according to a study by Birinyi Associates. Of the 23 two year congressional sessions since 1962, 13 have taken place under the auspices of a divided government, while 10 periods have been under one-party government. The results, as measured by SPX performance, are generally worse under one party rule. In those 13 periods when the government is divided, the market has risen 11 times and fallen twice; for the 10 periods of one-party government, it’s a seven-to-three split.
Market returns for the various GOP/Dem control combos play out as follows:
• When the Republican Party controls the White House and both houses of Congress (three periods), the S&P 500, on average, has increased 3.3%.
• When Republicans control the White House and Senate and the Democratic Party controls the House of Representative (three periods), the average return has been 22.4%.
• When Republicans control the White House and the Democrats control both houses of Congress (seven periods) the average return has been 13.9%.
• When Democrats control the White House and both houses of Congress (seven periods) the average return has been 14.7%.
• When Democrats control the White House and Republicans control both houses of Congress (three periods, all during Bill Clinton’s administration), the average return was 44.9%.
A House Divided Is Good
David A. Gaffen
August 1, 2006 9:49 a.m.