Sunday, August 29, 2010

Change In Control Of Congress And The Market

Many eclectic technical market indicators have surfaced recently given the uncertain direction of the economy and the stock market. We have the Hindenburg Omen, the Kindleberger Cycle just to name a few. I sometimes wonder if these indicators bubble to the surface or gain popularity because fundamental indicators do not support a bear market case.

In any event, one other technical indicator that may come to pass is the potential change in the party that controls Congress. The last time the Democrats held control of both houses of Congress and the White House was during the first two years of President Bill Clinton's first term in office in 1993 and 1994. During the mid-term elections in 1994, the Democrats lost control of both houses of Congress. Prior to the election, the Democrats held 57 senate seats and 258 house seats. Today the Democrats hold 55 senate seats and 256 house seats. So how might the stock market react if one or both houses of Congress change hands over to the Republicans?

Subsequent to the 1994 mid term elections and during the second half of Bill Clinton's presidential term, the stock market advanced over 34% in 1995.

From The Blog of HORAN Capital Advisors

If one believes in cycles and playing in favor of the market now is the fact the third year of a president's term tends to be the best performing one.

From The Blog of HORAN Capital Advisors

More detail can be found in an earlier post I wrote on this topic titled, Presidential Election Cycle Nearing Its Best Quarters. The above table comes from a Standard & Poor's research piece written by Sam Stovall and titled, Whistling a New Tune in June?

One can track the prediction market for these potential outcomes on Intrade. The likelihood that the House of Representatives changes over to Republican control has increased to 77% from below 30% at the beginning of 2009.

The reported economic data is certainly not suggesting strong growth. Slow growth is a potential outcome, but sentiment could change as the end of the year approaches. (This week will see some important economic reports with initial claims for unemployment reported on Thursday and non-farm payrolls reported on Friday.)

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