Investors Love Divided Government – 2010 Edition

Investors Love Divided Government – 2010 Edition


The correlation (or not) of stock markets, political parties, election expectations and investor psychology has been a recurring topic of interest to this blogger (see 2006, 2007, 2008 , 2009).

Along these lines, we are beginning to see articles speculating about the potential impact on markets and investors should voters usher in a new divided government in the fall.

Richard Lehman, writing at Forbes recommends“Sell Into Rallies And Thank Politicians”:,

“Markets will also benefit from any perception that the Democrats will lose control of at least the House of Representatives. Markets like divided government because it means fewer surprises and fewer policy changes. Use any stock rallies in the next five months to raise some cash since opportunities always come along when market conditions are uncertain.”

Joseph Lazzaro at the Daily Finance“Job Creation: Democrats Have Run Out of Time WithVoters.”:

” … if enough Independents vote for Republicans, the GOP will regain control of Congress, creating a divided government. Some investors argue that divided government is good for the markets and the economy, as it can ‘prevent Washington from doing anything’ — which some Americans view as a good thing. The reality, however, is that given the ideological canyon between today’s polarized political parties, it’s a prescription for gridlock.”

There is no doubt that should the GOP regain a majority in either house of Congress, we will certainly get episodes of gridlock. But if the legislation is needed, if there is real public demand for gridlocked legislation, the gridlock will eventually end as it always does. Out of that gridlock we will get better, more fiscally responsible legislation than we are seeing now under One Party Democratic rule. And that is a good thing.

The advantage of divided government is that both parties have a seat at the table of power. When both parties have real power, the bickering must be resolved by compromise. In contrast, the impotent bickering of the Republicans during the stimulus and healthcare debates was mostly ignored by the Democrats, resulting in fiscally irresponsible, one party legislative hairballs.

As far as stock market reactions, I am reluctant to link market behavior to any policy or partisan mix in Washington. I’ve not seen any studies that show a believable, statistically significant correlation between long term market direction and Republican, Democratic, or divided governments. That said – in the short term it is less important whether there really is a statistical correlation so much as whether investors believe there is a correlation. My sense is that most investors believe, as does Richard Lehman, that the stock market will benefit from Republicans taking control of either the House or Senate in the fall. With that expectation, a rising market could very well be a self-fulfilling prophecy. If the GOP begins to look like it has a realistic chance of taking control of one house, the opportunities alluded to by Lehman may come along sooner rather than later.

Climbing a wall of worry the markets posted big gains last week, including a dramatic 274 Dow points on Wednesday. This left many analysts scratching their heads after the unrelenting doom and gloom of recent weeks. CNBC broadcast a one hour special analyzing Wednesday’s market action. In this excerpt Ron Insana expresses caution, but finishes by insinuating that changing investor expectations for the mid-terms may have contributed to the rise:

Full clip from CNBC is linked here

Money quote:

“All of a sudden there are some reports coming out saying the politicians are underestimating the possibility the Republicans take either one or both house of Congress.If that political uncertainty disappears and you get a Democratic President and a Republican Congress – that is the best combination for stock prices It might also clear up the uncertainty that will allow corporations to hire people.” – Ron Insana

Indeed it might. And like in the 2006 mid-terms – perhaps happy days will be here again (at least as far as the market is concerned).

In case you were wondering why the picture of CNBC financial correspondent Amanda Drury introduces this post, I simply though it would help illustrate the question she asked the panel in the above clip. Nothing more.

Cross-posted from “Divided We Stand United We Fall”

  • gerryf

    There is no doubt that should the GOP regain a majority in either house of Congress, we will certainly get episodes of gridlock….

    Yeah because this Democratic Party plurality has resulted in so much progress…..