Despite their political differences, both Republicans and Democrats are united in their desire for economic prosperity, which translates into a wish to see the stock market flourish. Political gridlock, where no single party has complete control, typically results in beneficial outcomes for the stock market. This is mainly because significant changes are often moderated by the need for compromise between parties.
Historical data show that the stock market performs exceptionally well during periods when a Democrat occupies the White House while Republicans hold at least one chamber of Congress. Since 1989, the average return on the S&P 500 has been a substantial 33.9% in such scenarios. This performance is even more striking given there hasn’t been a single down year in these circumstances.
However, the situation changes when there’s a Republican president with gridlock; the average return drops to -2.8%, showing a significant difference in market performance based on the political landscape.
The recent Senate election results have shifted the dynamics, with Democrats now controlling both chambers of Congress, potentially affecting future market returns. Regardless, historical data continues to highlight the high returns associated with periods of political gridlock, particularly when a Democrat is president.
Global equities generally underperform compared to U.S. equities during gridlock, with a more pronounced underperformance when a Republican president is in office.
Investors should keep an eye on various financial policies and tax rates, as changes in these areas could impact stock market performance. Political leaders, aware of their power and its influence on markets, are likely to intervene to prevent any drastic policy shifts that could destabilize the stock market.
Finally, despite the unpredictable nature of politics and its impact on financial markets, historical trends suggest that political gridlock can be a period of prosperity for investors, making it a potentially bullish scenario for buying more equities.
