Political Gridlock Good for Markets? Another Common Theory Debunked

Stock markets love gridlock. This is what one would think after listening to investment pundits in the media. The thinking goes that markets hate uncertainty and with gridlock in Washington very little actually gets done, eliminating fears of new, unexpected legislation. However, a quick look at the numbers show that this theory is completely wrong.

Sam Stovall of Standard and Poor’s looked at historical U.S. stock market returns under three political scenarios, “unity” (one party controlling the presidency and both houses of Congress), “partial gridlock” (one party holding the presidency and another controlling Congress), and “total gridlock” (a split Congress). The results since 1900 show that the stock market actually hates gridlock. How this stuff gets repeated so often in the financial and political media is beyond me.

Annual Stock Market Returns Under Three Political Scenarios (Source: S&P)

Since 1900:     Unity +7.6%       Partial Gridlock +6.8%     Total Gridlock +2.0%

Since 1945:     Unity +10.7%     Partial Gridlock +7.6%     Total Gridlock +3.5%