Is A Divided Government Good For Stocks?

Retirement, Income, Tax & Estate Planning.

Is A Divided Government Good For Stocks?

November 12, 2020 Government Newsletter 0

The election is 10 days behind us. We have an initial idea of who the likely victor will be, but we won’t know for sure until the Electoral College meets on December 14th. In the meantime, whether Trump wins another term or Biden is inaugurated on January 20th, both would likely face a divided government.

I say this knowing that the House will stay with the D’s, so Mr. Trump for sure would continue with at least part of Congress blue. Should Biden move into the White House, he most likely will have a Republican Senate. If not, if both Democratic Senate candidates win their Georgia runoff elections, it would still be 50/50 in the Senate… hardly enough votes for the D’s to get much done.

What about the stock market? Here’s how Paul Vigna sums it up in Monday’s Wall Street Journal:

In the long run, though, there is little evidence split governments have an effect on stock returns. Since the 1928 election, there has been virtually no difference in the annual return of the S&P 500 in years when one party controlled Washington versus periods when power was split.

In fact, the index has slightly outperformed when control of the presidency and Congress has been unified under one party. In the 45 years that the same party controlled Congress and the White House, the average return on the S&P 500 was 7.45%, according to Dow Jones Market Data. In the 46 years that power was split, the average return was 7.26%.

Going back to 1929, the most common power structure in Washington has seen Democrats controlling the White House and both chambers of Congress. The S&P 500 rose an above-average 9.4% annually in those 34 years.

The next-most-common was a division in which Republicans controlled the White House and Democrats oversaw both houses of Congress. The market’s annual return in those 22 years was a below-average 4.9%.

What should we expect going forward? Nobody knows. As I always say… the market will do what the market will do. If you are a long-term investor, you probably have nothing to worry about. Short-term could continue to be rocky. Fasten your seatbelt.

Enjoy the weekend…
Peter