Investors’ so-called nightmare scenario appears on the brink of coming true: a Democratic president with an all-Democratic Congress.
As of this writing, Democrat Jon Ossoff is leading incumbent Republican David Perdue in the second of two Georgia Senate run-off races by 17,000 votes, with 98% of the vote counted. If Ossoff hangs on, his win—coupled with fellow Democrat Raphael Warnock’s defeat of incumbent Republican Kelly Loeffler the night before—would give the Democrats control of the Senate, House of Representatives and the White House, starting later this month.
Fears of “draconian” legislation being fast-tracked over the next couple years have many pundits believing this all-Democratic government could send the stock market into a tailspin. History says otherwise.
Divided Government vs. Democratic Government
Investment research firm Jefferies looked at market data following elections back to 1989. It found that when a divided government was led by a Democratic president, the average S&P 500 gain was 33.9%. Without a divided government, the gain was 22.5%.
So yes—a 22.5% is not as good as a 33.9% gain. But it’s not exactly a disaster.
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The only disaster scenario is the one we’re just emerging from: a Republican president with a divided government. When that happens – again, dating back to 1989, when George H.W. Bush took office – stocks have declined 2.8% on average, and that includes the 41% run-up from the last two years.
The fourth scenario – a Republican White House and an all-Republican Congress—produced the second-best return, on average, at 27%. However, when we had that setup from 2017-2019, during the first two years of Donald Trump’s presidency, it produced a more modest 16% return.
Bull Market > Politics
Lately, it hasn’t mattered which party occupies the White House or Congress. This bull market hasn’t relented no matter who’s governed the country over the last 12 years. Stocks have been thrown some serious haymakers during that time, none bigger than the worst global pandemic in a century. And every time, they’ve gotten back up off the mat.
My guess is stocks will be able to shrug off the mild surprise of an all-Democratic government as well. Thirty-plus years of numbers say such a scenario is not to be feared. The last time it happened, during the first two years of Barack Obama’s first term, from 2009-2011, the S&P 500 shot up 53%. Of course, the rally was jumpstarted by America’s recovery from what at the time was the worst economic recession since the Great Depression.
Sound familiar?
With the vaccine here, and an end to all our COVID-19 misery possibly in sight for the first time, a similar economic recovery seems likely. In fact, it’s already begun. You may believe, depending on your political affiliation, that an all-Democratic government may impede that recovery. But it didn’t 12 years ago.
It’s true that a divided government would have been the best-case scenario for investors. The numbers prove it. But the numbers also say a Democratic government isn’t the doomsday scenario some might have you believe. Draconian legislation or not, here’s betting share prices will be higher two years from now than they are today.
Probably much higher.
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