We all know the saying, “gridlock is good.” When applied to politics, gridlock typically refers to different parties controlling the White House and Congress. On the other hand, political harmony occurs when we have the same party controlling both the White House and Congress. With the upcoming election, the possibility for either political harmony or gridlock exists.
In Support of Gridlock
The belief that gridlock is good stems from the belief that not much change will come from Washington, thereby reducing uncertainty for businesses. Further, if legislation does pass, it should be better legislation that results from two opposing sides coming together for the greater good. Both sides should get some of what they want. When we look at the impact of gridlock on the stock market a couple of bright stars emerge.
From 1945 to 2015, there were 43 years of gridlock. We defined gridlock as any time congress was either split or controlled by a party different than that of the President. During those 43 years, the S&P 500 Index returned an average of 10.5% and was positive 76.7% of the time.
In Support of Harmony
While the results under gridlock look impressive, the results under times of harmony are actually better. When we look at the same time period from 1945 to 2015, we see there were 28 periods of harmony. While it is a smaller sample size than the gridlock group, there are still enough periods to provide meaningful results. The average return on the S&P 500 was an impressive 15.4% and the market was positive 82.1% of the time.
The results from harmony are better than the average gridlock results regardless of which party is in office. When Democrats controlled the White House and Congress, the market experienced an average return of 14.5%. When Republicans controlled the White House and Congress, the market experienced an average return of 18.7%. Both of these results were better than gridlock.
Why Harmony Wins
So why is harmony better for the market than gridlock? Political harmony typically leads to faster reactions to economic concerns and quicker development of stimulus to address those concerns. Additionally, this legislation will usually be valid for a longer period of time. This is beneficial to investors, since stimulus is usually directed at spurring growth in the economy and this, in turn, spurs
growth in stocks.
As we wait to see which party takes control of the White House, the House of Representatives and the Senate, we also need to recognize that the government only influences the economy. The overall economic trend and health of companies will drive the economy for near term performance. Yet, a little help from Washington could go a long way.
Source: Standard & Poor’s. Past performance is not indicative of future results. Standard & Poor’s (S&P) 500 Index is comprised of 500 large U.S. stocks. Indexes are unmanaged baskets of securities that investors cannot directly invest in; they do not include advisory fees or other investment expenses. The information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed.