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Republican Congress, Democratic president: The best pairing for investors?

November 12, 2014

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Investment Pairing

With the recent midterm elections giving control of the Senate to the Republicans, many observers have bemoaned that the tension between a Democratic White House and a Republican Congress may doom the country to even more political gridlock. However, from an investment standpoint, the results may not be so ominous.

History shows that voters just gave the country the type of governmental combination that has been better for the stock market than any other. Of course, this history is not guaranteed to repeat itself. But it is a useful reminder that the relationship between politics and the stock market is not always what one might assume.

A winning combination

The midterm elections left the country with a Democratic president and Republicans in control of the House and Senate, a combination that last occurred when Bill Clinton was president. That party alignment is one of eight possible combinations of how control of those three institutions can be allocated among the two parties.

Here is a rundown of how the stock market has fared since 1950 under each combination, based on price gains in the S&P 500:

Democratic president and Democratic control of the House and Senate: 19 years, average gain of 9.10 percent.
Democratic president and Democratic control of the Senate, with Republican control of the House: 3 years, average gain of 13.66 percent.
Democratic president, Republican control of the Senate, Democratic control of the House: No occurrences since 1950.
Democratic president, Republican control of the House and Senate: 6 years, average gain of 19.25 percent.
Republican president and Republican control of the House and Senate: 6 years, 13.81 percent.
Republican president and Republican control of the Senate, with Democratic control of the House: 6 years, average gain of 10.13 percent.
Republican president and Democratic control of the House and Senate: 22 years, average gain of 2.91 percent.
Republican president, Democratic control of the Senate, Republican control of the House: 2 years, -18.37 percent.

People often assume that Republican policies tend to favor Wall Street more than Democratic ones, but the above results suggest that the stock market has actually done better with a Democrat in the White House. However, by far the best combination for the stock market has been a Democratic president with Republicans in charge of both houses -- precisely the combination voters just chose.

Of course, there are a great many variables beyond party politics that influence the stock market. Even in the context of party politics, Democrats and Republicans today are quite different in ideology and policy priorities than they were 25 or 50 years ago. The strong track record earned with a Democratic president and Republican control of the House and Senate stems entirely from the Clinton administration. In short, the history is limited, and came under an especially pro-business Democratic president who had credibility with the investment community.

Things may seem very different now, but when the Republican's triumphed during Clinton's first midterm elections, the strong impression was that an adversarial split in the government would bring progress to a halt. Instead, the stock market went on to earn 20 percent or more in each of the next five years. Both parties would probably appreciate that kind of history repeating itself.

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