Elections May Signal Stock Rally

By Spencer Jakab, Wall Street Journal

Investors cheering for a Republican victory in Tuesday’s midterm elections may wind up being pleased by the outcome, but not for the reason they thought. If history is any guide, the combination of Republicans controlling both houses of Congress but not the presidency has been the best of all possible permutations.

Since 1945, returns for the S&P 500 when that situation prevailed were 10.1% compared with 8.8% for all years, according to Sam Stovall, U.S. equity strategist at S&P Capital IQ. But the dream scenario for the GOP—retaining Congress in two years and putting a Republican in the White House as well—wouldn’t rain on their portfolios. Those returns were nearly as high.

The conventional wisdom holds that “gridlock is good” and also that Republicans, the more business-friendly party, are better for stocks. Neither is clear cut, though.

Just looking at three scenarios irrespective of party control, the best returns occurred during periods of a unified government followed by a unified Congress and, bringing up the rear, different parties controlling each house. A split Congress with a Republican in the White House has seen the weakest returns while Democratic presidents have presided over much better average gains in the same scenario.

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