Midterm elections are less than 100 days away, and we will soon be in the thick of another season of electioneering. Each party will be telling lying to us about how much better they are for the economy.

History, however, tells another story. 

It turns out that a moderate centrist government is what works best for the markets.  Ideally, a divided government — where one or both houses of Congress and the White House are controlled by the opposition party — creates an environment where stocks can flourish.

My thesis is that a divided government forces both parties to the middle, controls deficits and cuts taxes. The present all GOP rule is surprisingly reminscent of the Democrat control of Congress with a Democratic President:  in each instance, fiscal prudence ent out the door, and foreign policy ventures were fairly disastrous.

The Democrats "Taxed & Spent," while the Republicans "Borrowed & Spent." Neither instance was good for equities.   

Is there support for these statements?

Yes, according to a study by Birinyi Associates. Of the 23 two year congressional sessions since 1962, 13 have taken place under the auspices of a divided government, while 10 periods have been under one-party government. The results, as measured by SPX performance, are generally worse under one party rule. In those 13 periods when the government is divided, the market has risen 11 times and fallen twice; for the 10 periods of one-party government, it’s a seven-to-three split.

Market returns for the various GOP/Dem control combos play out as follows:

• When the Republican Party controls the White House and both houses of Congress (three periods), the S&P 500, on average, has increased 3.3%.

• When Republicans control the White House and Senate and the Democratic Party controls the House of Representative (three periods), the average return has been 22.4%.

• When Republicans control the White House and the Democrats control both houses of Congress (seven periods) the average return has been 13.9%.

• When Democrats control the White House and both houses of Congress (seven periods) the average return has been 14.7%.

• When Democrats control the White House and Republicans control both houses of Congress (three periods, all during Bill Clinton’s administration), the average return was 44.9%.

A House Divided Is Good
David A. Gaffen

August 1, 2006 9:49 a.m.

Category: Markets, Politics

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “A House Divided Is Good”

  1. Chief Tomahawk says:

    It would be interesting to know these stats with the rise and fall of the greenback factored in… for example the returns the last five years alone are really negative when the 25+% loss in value of the dollar is factored in. In that light it’s very difficult to talk up the markets…

  2. M.Z. Forrest says:

    I wouldn’t subscribe to the centrist thesis. The problem with undivided government is things actually tend to change. For better or worse businesses make their decisions, sometimes 20 or 30 years out, based on what is true today.

  3. BDG123 says:

    I’ve always subscribed to the notion that the more gridlock the better. How is that best accomplished? Sharing power.

    Since politicians invariably screw things up the more they pass legislation, the markets perform better when they are busy squabbling and actually doing nothing.

    Man, that is sad but how I feel. Sad because we can’t seem to count on much. Hey, they all love to spend so I figure why not a Democrat? It’s either corporate welfare with the Repubs and big defense bills, breaks for business, etc or it’s social programs. At this point, give me the second choice.

  4. BDG123 says:

    Btw, question for the board. Would the Iraqi war happened with a Democratically controlled Congress? Would government wiretapping and all of this other scary stuff have happened with a Democratically controlled COngress?

  5. Chief Tomahawk says:

    What would L. Kudlow have to say about this? “The greatest story never told”???

  6. Mike B says:

    I don’t think this scenario will work out very well in the 2007-2008 timeframe. Bush has proven himself a big spender, so he is unlikely to veto any big spending bills the Democrats want to pass. He may veto a big tax increase bill which will just keep us in the same situation we are in now: big government defecits.