Politics and Profits
10/04/2016 9:00 am EST
The November 2016 presidential election cycle has been dominated by two outsized personalities. The increasingly vituperative parrying between the two party’s standard-bearers, however, has served to obscure equally significant races for the House and the Senate, explains Stephen Biggar of Argus Research.
In the 2014 mid-term elections, the Senate joined the House in switching to majority Republican.
With the president suffering low popularity at the time, the GOP appeared poised to take control of all three executive and legislative chambers — Presidency, House of Representatives and Senate — in November 2016.
During the 2015-16 primary season, the GOP candidate excited a narrow slice of the electorate, a strategy that enabled him to pick off 16 contenders one at a time, but may have cost the GOP a shot at attracting the broad coalition required to win the White House.
With the president’s popularity now over 50% and the GOP candidate potentially hurting down-ticket races, some speculate it is the Democrats who could come away with control of all three branches.
But the Democratic standard-bearer has unpopularity ratings not much different from those of the Republican candidate.
Dominance of Presidency, Senate and House by one party matters a great deal in terms of ability to set legislative agenda.
Although Democrats have experienced this dominance for just two years since the mid-1990s, the president used that brief period (2009-10) to push through the Affordable Care Act — which will likely define his presidency.
Investors are also attuned to each party’s scorecard in the three chambers, but for exactly the opposite reason. The popular wisdom is that the best outcome in Washington is gridlock.
Investors perceive that when one party is dominant, ideology supplants pragmatism and compromise; expensive and impractical legislation is passed; and the market suffers.
Our analysis of S&P 500 performance since 1945 does not substantiate that, however. Our work suggests the market has outperformed in years in which one party prevailed.
While talk of a Washington-Wall Street link is widespread, in fact the market drivers in any year may have more to do with the economy and earnings than with the White House and Congress.
Over the 1945-2015 span, encompassing 71 years, our analysis shows 27 years in which one party controlled the Presidency, the House and the Senate.
For these years, the average change in the S&P 500 (excluding dividends) was 10.0%. We also count 44 years in which either the Democrats or Republicans controlled two of the three. For these years, the average change in the S&P 500 (excluding dividends) was 7.1%.
Given the 290-bps outperformance in years in which one party was dominant (3-0), dominance has not stood in the way of the stock market; and gridlock is not all it’s cracked up to be.
Since 1945, the market appears to do better when the GOP is “in charge” compared to when the Democrats are in charge. For our analysis, we defined “in charge” as years in which one party either controls the Presidency, House and Senate, or controls two out of three.
First, the Democrats. Since 1945, and excluding dividends, the S&P 500 has averaged gains of 9.5% when Democrats controlled Presidency, House, and Senate; 6.1% when Democrats controlled two of the three; and 7.7% when Democrats controlled Presidency, House, and Senate or two of the three.
Since 1945, and excluding dividends, the S&P 500 has averaged gains of 13.0% when Republicans controlled Presidency, House, and Senate; 8.4% when Republicans controlled two of the three; and 9.2% when Republicans controlled Presidency, House, and Senate or two of the three.
The division between the two parties on presidential leadership since 1945 is remarkably even as measured in years, but not in stock performance. The perception that the market does better when Democrats are in charge likely stems from a focus on the Presidency — and here, the perception is correct.
For the 71 years between 1945 and 2015, Democrats have held the White House for 35 years (and 2016 marks the 36th year). For those years since 1945 in which Democrats have held the White House, the S&P 500 has averaged appreciation of 10.2%, excluding dividends.
For the 71 years between 1945 and 2015, Republicans have held the White House for 36 years. For those years, the S&P 500 has averaged appreciation of 6.2%, excluding dividends.
Each election cycle has its own nuances, and analysis of historical events only gets you so far. We 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.
Still, we believe this analysis supports the view that Washington gridlock is over-rated as a stock-market driver.
By Stephen Biggar of Argus Research