Is Political Gridlock Over-Rated?

09/28/2020 5:00 am EST

Focus: TAXES

James Kelleher

Director of Research & Senior Analyst: Technology, Argus Research Corporation

Nothing is normal in this pandemic year and that includes the presidential election to be held in November 2020, notes Jim Kelleher, director of research at Argus Research, a leading independent research firm.

The two sides have held their virtual conventions, neither of which provided the usual post-convention bump in the polls for the incumbent or the challenger. Partisan support has hardened on both sides, and the decisive wedge of undecided voters seems narrower than ever.

Foreign election interference caught the public unawares in 2016, and that has made the electorate more vigilant toward this threat.

With the federal government downplaying any threat from Russia, responsibility for minimizing the influence of foreign actors has swung from the government to the social media platforms that increasingly dominate the national dialog.

In the 2018 mid-terms, the Democratic Party broke the hegemony that the GOP enjoyed in the two years after the November 2016 elections. Dominance of presidency, Senate and House by one party matters a great deal in terms of ability to set legislative agenda while avoiding the presidential veto.

Investors are also attuned to each party’s scorecard, but for exactly the opposite reason. The popular Wall Street wisdom is that the best outcome in Washington is gridlock.

Investors perceive that when one party has hegemony, which we define as controlling the presidency, House, and Senate simultaneously, ideology supplants pragmatism and compromise; expensive and impractical legislation is passed; and the market suffers the consequences.

Our analysis of S&P 500 performance since 1945 does not substantiate that widely held perception, however. Our work suggests that the market has actually outperformed in years in which one party prevailed.

Recent history is instructive, and also cautionary. One such year of hegemony was 2017, when the GOP controlled the presidency, House, and Senate, and the S&P 500 delivered capital appreciation exceeding 19%.

Then came 2018. In a year in which the GOP retained its hegemony across presidency, House and Senate, the S&P 500 declined by more than 6%. The lesson is that investors should not assume a statistical tendency constitutes a performance guarantee.

Each election cycle has its own nuances, and analysis of historical events only gets you so far in seeking to forecast market patterns. We would also caution that, notwithstanding the elevated sense of self-importance emanating from inside the beltway, Washington likely ranks fairly low on the list of market drivers for any year or cycle.

That has never been truer than in this pandemic year, when for many people economic survival and even personal survival is paramount. Still, we believe this analysis supports the view that Washington gridlock is over-rated as a stock-market driver; and that single-party dominance is not the bane to market returns that it is popularly assumed to be.

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