Politics and the markets

WALL Street is expected to open higher on the back of the Republican victory in the Senate. Does that make sense in historical terms? Yes and no. Wall Street’s general preference for Republicans may be down to the tax rates that brokers and investors pay as individuals, rather than the impact on the market; since 1926, the average annual stockmarket gain under Democrat Presidents has been 11.2%, under Republicans just 2.7%.

But the picture is a lot more nuanced when one starts to allow for the effect of shared control of the executive and legislature. The table shows the six possible combinations; Republicans with Presidency, Senate and House; Democrats with all three; Republican Presidents with both houses against them; Democrats ditto; Republicans with one house against, and one for; Democrats ditto. I took the figures for stockmarket gains or losses from the Barclays Equity Gilt Study and my Congressional numbers from here. I treated Congressional terms as ending in the December immediately after each election to make things easier, and I left 2001 out of the numbers because power in the Senate changed hands in the middle of the year.

The table shows the average return for each outcome, with the number of years it occurred in brackets.

Rep sweep       Dem sweep     Rep versus 2    Dem vs 2      Rep vs 1     Dem vs 1

10.4% (10)       10.6% (34)      1% (23)             13.2% (8)      -0.2% (8)   12.1% (4)

As you can see, the market’s problems have not occurred when Republicans are in control of the executive and both houses; it has occurred when a Republican President has coincided with Democrat control, of either the House or the Senate or both. The market has done fine when a Democrat President has coincided with a Republican Congress, as indeed has been the case since 2010.

Of course, one shouldn’t read too much into these numbers. First, how the stockmarket performs may have more to do with the global economy and technological change, than with politics. Republicans may have been just unlucky. Second, there have been only 12 years when Democrat Presidents have been faced with hostile Congresses, of which half occurred during the 1990s tech boom.

Still, the figures indicate why, on this score at least, the market is right to be relaxed. Furthermore, it is hard to imagine that 2016 will come up with what history suggests is the worst outcome; a Republican President and a Democrat Congress. The electoral swings would have to be very odd for that to occur from here.