Gridlock is widely assumed to be good for stocks because a divided government is less likely to pass new legislation or regulations, which is viewed positively for businesses and, therefore, stock prices. But S&P crunched some numbers and found that gridlock may not be as great as it appears. From my “Technically Speaking” column:
Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research, said research dating to 1900 shows stocks have actually performed worse in the two years following midterm elections when gridlock ensued as opposed to an environment under a unified government.
Mr. Stovall compared three different political scenarios following midterm elections: total unity with one party in control of the White House and Congress; partial gridlock with a unified Congress and a different party in the White House; and total gridlock with a split Congress.
“From a very simplistic perspective, the resulting equity market strength in this scenario appears logical,” Mr. Stovall said in a recent note. “Under a unified-party government, if the president proposes legislation, it will likely be rubber-stamped by Congress, thereby stimulating the economy, increasing output, and raising corporate earnings and propelling shares higher.”
The Standard & Poor’s 500 has averaged a 7.6% gain in the 67 years since 1900 under total unity. By comparison, the index has averaged a 6.8% return in the 32 years under partial gridlock. And under a total gridlock scenario, like the current situation, the S&P 500 has averaged only a 2% gain.
Under total unity and partial gridlock, the S&P 500 has performed better under a Democratic administration when compared to Republican leadership since 1900. But in a total gridlock scenario, the market has performed better under a Republican president than a Democrat.
To be sure, Mr. Stovall notes there is a small sample size to draw conclusions from the total-gridlock scenario. There have been only 12 years since 1900 under total gridlock, so the data may be skewed.
But he remains confident that the popular notion regarding gridlock needs to be reconsidered.
Still, the benchmark indexes are up 3% this week as investors are applauding the election results and the Fed’s QE2 announcement.
Don’t jump the gun just yet: It’ll take more than a week to determine if gridlock is actually good for stocks or not.