Saturday, October 30, 2010

Gridlock In Washington And The Market's Performance

If one believes history has a way of repeating itself or at least looking similar, investors might hope that the Republicans gain control of the Senate as well as the House next Tuesday. We have noted on page 4 of this link that the third year of a presidents term in office tends to be the strongest from a stock market perspective; however, this might hinge on the makeup of Congress.

Many prognosticators are already projecting control of the House of Representatives will swing to the Republicans. The prediction website, Intrade, is showing that the odds of the Republicans taking control of the House has increased to nearly 92% versus under 20% at the beginning of 2009.

From The Blog of HORAN Capital Advisors
Source: Intrade

Additionally, Ireland's largest bookie, Paddy Power, has paid gamblers early that bet the House would go Republican noting "there would be nothing short of a miracle for the Democrats to maintain control of the House."

As the below table shows, in an environment where control of Congress is split between Republicans and Democrats, and the presidential party is Democratic, the market's performance has been its worst since 1900. In an environment where the Republicans control both Houses of Congress and there is a democratic president, historically, this has been an environment where the market generates some of its best returns.

From The Blog of HORAN Capital Advisors

S&P surmises that one reason the market does not perform well when Congress is split is due to the fact the market's do not like uncertainty. With a split Congress there does tend to be less accomplished in Washington. One thing seems certain at this time and that is the country needs to get control of the spending coming out of Washington. This will require some difficult decisions to be made in Washington in the coming year and a split Congress might prevent the hard decisions from being made.

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