The recent stock market rush may indicate that investors believe the prospect of a divided government is good for the economy and its portfolios.
Joe Biden, who is likely to be confirmed as the next president, has shown himself to be a moderate in the Democratic primary, resisting pressure from the left wing of his party to endorse reforms such as the Green New Deal, Medicare for All and a property tax.
However, he has promised to increase corporate and income taxes for the wealthiest households, to extend the protection of the Affordable Care Act and to counter climate change by eventually weaning the United States from fossil fuels. Many of these changes will be harder to push through if the Republicans control the Senate, as is now expected of them.
If Joe Biden becomes president and the Senate remains in Republican hands, as seems likely now, investors seem to be betting that a split government will not mean a big tax increase, a substantial increase in environmental or fiscal regulations, or a Green New Deal.
“The story is a great guide, but it is never a gospel,” Sam Stovall, chief investment strategist at CFRA Research in New York and author of The Seven Rules of Wall Street, told Washington Newsday.
“Wall Street is adaptable,” Stovall said. “It will always try to find a way to make money, whether there’s a Democrat or Republican in the White House, or whether the president is supported by a unified Congress or opposed by the other party.
The three major stock indices, the Dow Jones Industrial Average, the Nasdaq and the S&P 500, rose on Thursday and are on their way to their best week since the beginning of April.
The stock market returns of each party, from election day to election day, were higher among Democrats (9.4%) than among Republicans (6.5%). But four Republican presidents recorded double-digit gains during their term of office, compared to only one president among the Democrats.
In the 76 years since 1944, the government has had three basic configurations: Unity Government, in which the White House and Congress were controlled by the same party; Unity Congress, in which a president of one party faced a unified House of Representatives and a Senate controlled by the other party; and a split Congress, in which the House of Representatives and Senate were controlled by different parties.
“General George S. Patton said, ‘Lead me, follow me, or get the hell out of my way’ – and a split Congress is basically out of the way,” Stovall said.
Stovall said that the best average return in the calendar year – 13.6% – was achieved in a split Congress with a Democratic president.
The S&P 500 rose 10.6% on average in 30 years of unified government, compared with an average of 8.8% for all 76 years, Stovall said. But a counterparty unified congress returned only 7.4 percent, compared with 8.6 percent under a split congress.
The S&P 500 recorded the highest average annual growth rates among Democratic Bill Clinton (+16.5%), Republican Donald Trump (11.24%) and Republican George H.W. Bush (11.19%).
The weakest returns were achieved under Democrat Jimmy Carter (+5.8%), Republican Richard Nixon (-4.0%) and George W. Bush (-4.3%), Stovall said.
Growth during a president’s term of office can also be revealing.
“The strongest growth in earnings per share was recorded during the Obama years, when companies were recovering from the financial crisis,” Stovall said. “The second strongest period was under President Clinton, possibly due to the ‘peace dividend’. The third strongest was under Harry Truman in response to the postwar economic boom.
Due to recessions or economic slowdowns, the weakest stock growth was under Bush-41, Bush-43 and Trump. However, Stovall noted that the data underscored a discrepancy between stock market returns and U.S. economic growth.
Real GDP grew most strongly under President John F. Kennedy and expanded strongly under Truman. The weakest economic growth took place under father and son Bush and Trump.
But that may not tell the whole story.
“All presidents have suffered economic and market downturns, some more than others,” Stovall said in a research report.
“The terms of Presidents Nixon and Bush-43 were ended by recessions, while (Dwight) Eisenhower struggled with three, Stoval wrote