Divided we make money: Why the stock market wants a Republican victory

Historical analysis shows that the stock market does best under a divided government – especially with a Democratic president in the White House and a Republican-controlled Congress. Big GOP gains this midterm election could mean big gains for Wall Street, too.

For voters distraught about the prospects of a Democratic bloodbath in the midterm elections and the potential loss of control of Congress, consider this: a changeover may be great news for the stock market.

Election coverage: News and analysis for the 2010 midterm elections

Conventional wisdom suggests Wall Street may be most receptive – and responsive – to Republican control of government and the pro-corporate policies typically supported by the GOP. But the evidence suggests that the stock market actually fares best under a divided government, when the party that controls the White House differs from the majority party in Congress. In fact, the winning combination for Wall Street seems to be a Democratic president with a counterbalance of a GOP-led Congress.

Stocks grow under divided government

Recent studies suggest some aspects of the economy generally perform better under Democratic presidents than Republicans. This appears to be specifically true of the stock market. Between 1975 and 2009, the Dow Jones Industrial Average climbed 11.6 percent annually on average during Democratic administrations, compared to 8.5 percent during Republican presidencies.

But here’s where the real difference shows up.

Stock market performance over the same period has been markedly better under divided control of government – when one party has controlled the White House but not both chambers of Congress – than when the party in the White House also has a majority in Congress. The Dow rose by 6.1 percent annually on average during periods of unified government, but climbed at more than twice this pace (by 11.1 percent annually on average) during episodes of divided control.

The Dow does also seem to fare slightly better under Republican control of the US House, growing by an average 11.1 percent annually between 1975 and 2009, compared to 9.0 percent when Democrats control the House. But, still, no political power arrangement correlates better with strong stock market performance than a government divided between two parties.

More on the economy: Check out these 1 Minute debates on tax cuts and job creation.

The most striking performance

In fact, the most striking difference emerges when we compare Dow performance during Democratic presidencies under different combinations of partisan control of the House. Stock performance when Democrats ruled both the White House and the US House grew by 4.8 percent annually on average between 1975 and 2009. But the Dow rose an astounding 19.5 percent per year on average when Democratic presidents were faced with a Republican controlled House of Representatives.

This is good news for the upcoming elections. If this pattern holds true in the current period, and if the GOP succeeds in wresting control of the House from Democrats in 2010, the Dow Jones Industrial Average will probably top 13,000 before long.

With division comes stability

So why does the stock market like a divided government?

One explanation for these patterns may be that Wall Street favors the slower pace and compromises that typify lawmaking during episodes of divided government. Stability and less precipitous shifts in public policy are preferable to investors and Wall Street. Gridlock in Congress may not be ideal in many respects, but it does mean that lawmakers will devote adequate time to thinking bills through and to making deals that yield legislation that is less extreme.

Whatever the cause, the historical patterns suggest Republicans’ gaining control of Congress in 2010 would probably stimulate stock performance in the short term. Despite the economy’s partial recovery from the late-2008/early-2009 nose-dive, Wall Street has a ways to go before reaching (and topping) the highs achieved in 2007.

Toppling Democrats in Congress in 2010 may be the antidote Wall Street needs to reboot its bullish proclivities.

Costas Panagopoulos, Ph.D., is Executive Editor of Campaigns & Elections magazine. He is also Assistant Professor of Political Science and Director of the Center for Electoral Politics and Democracy at Fordham University.

A version of this article was first published in Campaigns & Elections magazine.

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