For voters distraught about the prospects of a Democratic bloodbath in the midterm elections and the potential loss of control of Congress, consider: this may be great news for the stock market. Conventional wisdom suggests Wall Street may be most receptive—and responsive—to Republican control of government and the pro-corporate policies typically supported by the GOP, but the evidence suggests that the stock market actually fares best under divided government, when the party that controls the White House differs from the majority party in Congress. In fact, the winning combination for Wall Street seems to be a Democratic president with a counterbalance of a GOP-led Congress.
Recent studies suggest some aspects of the economy generally perform better under Democratic presidents than Republicans. This seems to be true of the stock market. Between 1975 and 2009, the Dow Jones Industrial Average climbed 11.6 percent annually on average during Democratic administrations, compared to 8.5 percent during Republican presidencies. But stock market performance over the same period has been markedly better under divided control of government—when one party has controlled the White House but not both chambers of Congress. The Dow rose by 6.1 percent annually on average during unified government over this period, but climbed at more than twice this pace (by 11.1 percent annually on average) during episodes of divided control.
The Dow also seems to fare slightly better under Republican control of the U.S. House, growing by an average 11.1 percent annually between 1975 and 2009, compared to 9.0 percent when Democrats control the House.
Perhaps the most striking difference emerges when we compare Dow performance during Democratic presidencies under different partisan control of the House. Stock performance when Democrats rule both the White House and the U.S. House grew by 4.8 percent annually on average between 1975 and 2009, but the Dow rose an astounding 19.5 percent per year on average when Democratic presidents were faced with a Republican House of Representatives. If this pattern holds true in the current period, and if the GOP succeeds in wresting control of the House from Democrats in 2010, the Dow Jones Industrial Average will likely top 13,000 before long.
One explanation for these patterns may be that Wall Street favors the slower pace and compromises that typify lawmaking during episodes of divided government. Stability and less precipitous shifts in public policy are preferable to investors and Wall Street.
Whatever the cause, the historical patterns suggest Republicans’ gaining control of Congress in 2010 would likely stimulate stock performance in the short term. Despite the economy’s partial recovery from the late-2008/early-2009 nose-dive, Wall Street has a way to go before reaching (and topping) the highs achieved in 2007. Toppling Democrats in Congress in 2010 may be the antidote Wall Street needs to reboot its bullish proclivities.
Costas Panagopoulos, Ph.D., is Assistant Professor of Political Science and Director of the Center for Electoral Politics and Democracy at Fordham University. He is also Executive Editor of Campaigns & Elections magazine.