Do Markets Care About Politics?

On Wednesday night, Larry asked me what the 2005 elections might mean to the Markets; I think my answer surprised him a bit: If his pollster guests were correct, than the GOP might lose the House in 2006.

And the markets would like that.

Mind you, this isn’t a GOP or a Dem thing; markets simply like divided governments. Even prefer it.

The reasons for this are pretty apparent:  A divided government — different parties controlling the White House and one or both brannches of Congress — has a very specific impact. It forces both parties to the center. It reduces excessive spending. Pork becomes a moderate expenditure, rather than the drunken spending spree its been as of late with GOP control. Vetoes are more likely. Tax policy tends to get frozen in place. Since ideology is neutered, any decreases in spending or increases in taxes are straight percentage changes across the boards. That’s much easier to negotiate than trying to convince the other side their ideology is wrong while yours is correct. 

So I told him that if the GOP loses control of even one house, it might bode well for market performance. Unfortunately, that performance won’t be until 2007 when they are sworn in, and maybe even 2008 when whatever new policies are enacted start to have an economic/market impact.

Recall that the Markets did extremely well under both Reagan and Clinton, who each had a Congress of the opposing party. Even the first President Bush saw the S&P500 rise more than 57% in his four years in office.


Reagan 1980-88
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Clinton 1992 – 2000
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Of course, Reagan was the first 40% of an 18 year Bull run, while Clinton was the last 40%. Same for Eisenhower’s presidency — his two terms (1952-60) were in the heart of the post-WWII rally, that ran from 1946-1966.

Here’s the WSJ’s take:

PRESIDENT BUSH’S approval rating, according to various opinion polls, has dropped in recent months, but the decline is just the tail end of a steady drop since a high point shortly after the Sept. 11 attacks.

Note: Lines track positive answers to each poll’s key question on presidential approval rating.

President Bush Approval Rating

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Source: WSJ

Senate Races:  Battleground States

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Source: WSJ


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  1. Brian commented on Nov 11

    Kudlow is a good example of that cliche: if all you have is a hammer everthing looks like nails.

    “Karl Rove hasn’t been indicted yet. Is that why the stock market went up?”

    One-party rule is a disaster. Hope the dems can pull their act together. Hint: find more guys like Paul Hackett. You’ll own the west and midwest.

  2. Jack K. Miller commented on Nov 11

    Thank you for the excellent post. My take is different but your information is excellent.

    My feeling is that Bush is acutally gearing up right now for a win in the off year congressional election. If he does so, I believe, he will have been the first president ever to pick up seats in back to back off year elections.

    Many would chuckle if they read the above paragraph. However, things looked pretty gloomy after the first year of the first Bush term. Expectations were low but the election was good.

    As far as the market goes, it could do very well all next year for the same reasons you suggest in 2007. The current house is a divided house. The conservatives can not push through legislation because the moderate republicans are in revolt. Perhaps a significant part of the current rally has to do with the fact that the congress is stuck in limbo.

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