The stock market rallied this past week as investors welcomed voter’s split decision.  Democrats picked up at least 30 GOP-held seats to gain control of the House, with 10 more contests still too close to call as of this writing.  In the Senate, Republicans currently hold 51 seats to the Democrats 46.  Votes are still being counted in the Senate races in Florida and Arizona, and there will be a run-off election in Mississippi.

 

As the following table shows, the stock market has typically done quite well following midterm elections.  There are several rationales offered for this tendency.  Perhaps the most compelling are that investors are grateful that the election is finally over and the speculation on election results is replaced by certainty.

 

 

This past week’s strong stock market performance may have been bolstered by the fact that the Democrats were able to wrest control of the House from Republicans.  “Gridlock is Good” is a common saying amongst both stock traders and market prognosticators alike.  Historically, stocks have done quite well when neither party has control of both Congress and the White House.  For example, since 1928, stocks have produced an annual average return of 12% in years when a Republican president held office and control of Congress was split between Democrats and Republicans according to data published by Bank of America.  The thinking goes that when there is a balance of power not much will get done, and less is often more when it comes to legislation and the economy.

 

Market analysts have already begun to speculate on how this years’ midterms will impact various sectors of the stock market and bond markets.

 

  • The industrial and material sectors will benefit if Democrats and Republicans are able to collaborate on an infrastructure plan.  President Trump has gone on record that he would support additional infrastructure spending.

 

  • Both parties and the President have politicked on reining in the explosion in drug prices, which would hurt the pharmaceutical sector.

 

  • By comparison, Democrats are unlikely to go along with Republican attempts to further roll-back The Affordable Care Act (a/k/a “Obamacare”), which is good news for the insurance and health care sectors.

 

  • Congressional investigations and potential impeachment proceedings could weaken President Trump’s hand and force him to soften his aggressive trade strategy.  That, in turn, could provide a boost to the domestic large cap sector, which is comprised of U.S. companies that derive a large share of their profits from trade and international operations.

 

  • A democratically controlled House is unlikely to go along with President Trump’s desire for new middle-income tax cuts.  Most economists believe additional tax cuts would have increased the budget deficit, which would have created additional upward pressure on interest rates.  That would have been a negative development for the bond markets.

 

Given the foregoing, you may be asking: “what steps should I be taking in response to this year’s election results Mr. Market Commentator?  Well, if you believe in a systematic, academically supported, rules-based investment approach like me, then the answer is you should probably stand pat.  History has many examples of the dire consequences that can befall investors who let their political beliefs drive their investment decisions.  Recent examples include conservatives who pulled out of the market when President Obama was elected, only to miss out on the historic bull market during his presidency, and liberals who were done in by the bets they placed against stocks when President Trump won.

 

In short, if you have a solid investment plan in place and your investments are sufficiently diversified, then The Market’s Commentator’s suggestion for you is to stay the course.  Playing politics with your portfolio could lead to higher returns, but the odds are against it.

 

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