An Election Sweep Is Good for Stocks No Matter the Winning Party

(Bloomberg) -- Turns out when one political party has total control of Washington, D.C., it’s a good environment for the stock market. And it doesn’t matter who’s in control.

That’s according to Nicholas Colas, co-founder of DataTrek Research, who studied equity returns in periods when one party controlled both the White House and the Congress. Since 1945, there have been 30 years when Washington was in the hands of one party. In those periods on average, stocks performed better than in years with a divided government.

“The historical data points to a good future U.S. equity investment environment even if Democrats sweep the White House and Congress this November,” Colas wrote Tuesday. “If nothing else, this does explain why equity markets have been resilient even as the odds of this outcome have risen in recent weeks.”

Of course, making investment decisions based on political affiliation is a risky strategy. First, predict the winner correctly. Then, guess how policy will affect markets. Many said a Donald Trump presidency would be bad for stocks, and those calls were blatantly wrong in hindsight. Now, with the 2020 election less than five months away, forecasts are emerging again.

Contrary to popular belief that equities perform better under a divided government, Colas’s data show the opposite is true. In the eight years in the post-war period that Republicans controlled Congress and the White House, the S&P 500 on average returned 16%. In the 22 years that Democrats had total control, the benchmark returned an average 14.3%.

Both are greater than the index’s annual growth rate of roughly 11% over all years since 1945.

“A small sample size, but it does seem to show that having one party in control of Congress and White House is good for U.S. stocks,” Colas wrote. “Both parties outperform that benchmark, with Republicans holding a slight lead. Again, this is a small and noisy sample but interesting history nonetheless.”

At the same time, both the greatest bull runs and the worst years have come when neither political party had complete control. Take the late 1990s, for example, when Bill Clinton was president and Congress was controlled by Republicans, yet the S&P 500 returned 20% or more each year. On the other hand, in 2008 during the financial crisis, the government was also divided.

“This is a good example of why we are always cautious about attributing stock market returns to political environments,” wrote Colas.

Read more: Trump and Corporate America Part Ways on Race: Wall Street Votes

Evaluating political parties’ effects on stock market returns is a common practice, but many studies offer different conclusions. A past Vanguard study showed variations in equity performance under different party presidents are almost negligible in 160 years of data. An OppenheimerFunds report found the market usually outperforms under a divided government. Meanwhile, a Ned Davis Research study showed the combination of a Republican president and a split Congress has resulted in the Dow falling an average of 6% a year.

Bill Ackman, founder and portfolio manager of Pershing Square Capital Management, says his firm doesn’t make investment decisions based on politics. When asked what he would do Monday at the Bloomberg Invest Global virtual conference if he knew who would win the 2020 election, Ackman responded:

“It really wouldn’t change anything that we’re doing. Our strategy is to buy super high quality, dominant companies that can withstand a pandemic, or a dramatic movement in interest rates, not particularly exposed to the economy. Who the president is is not something that we would make a bet one way or another on the portfolio.”

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