The mass media often finds itself in one big feedback loop, and the latest fixation for financial talking heads is the notion that political gridlock is good for the markets. In today’s elections, Republicans are expected to take back control of the House of Representatives and trim their deficit within the Senate. The idea is that when there is political gridlock, the government is limited in its ability to pass meaningful regulation that could crimp business, which in turn causes the stock market to go up. The only problem is, the facts don’t support this analysis.
Stock markets love gridlock. This is what one would think after listening to investment pundits in the media. The thinking goes that markets hate uncertainty and with gridlock in Washington very little actually gets done, eliminating fears of new, unexpected legislation. However, a quick look at the numbers show that this theory is completely wrong.
Sam Stovall of Standard and Poor’s looked at historical U.S. stock market returns under three political scenarios, “unity” (one party controlling the presidency and both houses of Congress), “partial gridlock” (one party holding the presidency and another controlling Congress), and “total gridlock” (a split Congress). The results since 1900 show that the stock market actually hates gridlock. How this stuff gets repeated so often in the financial and political media is beyond me.
Annual Stock Market Returns Under Three Political Scenarios (Source: S&P)
Since 1900: Unity +7.6% Partial Gridlock +6.8% Total Gridlock +2.0%
Since 1945: Unity +10.7% Partial Gridlock +7.6% Total Gridlock +3.5%
Sources:
Political Gridlock Good for Markets? Another Common Theory Bebunked
Chad Brand
Peridot Capitalist, November 2, 2010
http://www.peridotcapitalist.com/2010/11/political-gridlock-good-for-markets-another-common-theory-debunked.html
Gridlock Is Not Good
Sam Stovall
Standard & Poors, October 29, 2010
http://www.spoutlookonline.com/NASApp/NetAdvantage/mkt/OutlookMarketInsight.do?subtype=OWMO&pc=NET&tracking=NET&context=Company
