Investors may not yet know exactly what the political landscape will look like once all the votes have been counted. But one thing they can know? How stocks historically perform under a divided Congress, where one party controls the Senate and the other controls the House.
Many on the Street now believe Republicans could maintain control of the Senate, a prospect that until recently wasn’t considered the base case scenario (currently, races are tight). On Wednesday, stocks soared at the possibility of a split Congress—seemingly looking beyond the tumultuous presidential contest.
Historically, a divided Congress tends to be good for stocks: “The S&P 500 historically has done quite well under a divided Congress, up more than 17% on average,” analysts at LPL Financial wrote in a note Wednesday (see chart). “Additionally, in years with a divided Congress, stocks have been higher the past 10 times, with 2020 potentially being the 11th in a row.”
The reason is due in part to the fact that stocks “tend to like gridlock and taking out major policy disruption,” LPL’s Jeff Buchbinder told Fortune Wednesday. In a 2020 context, a divided Congress might lower the risk of a big tax hike if former Vice President Joe Biden were elected.
Buchbinder believes short-term there may be some volatility until investors get clarity about the election results, but “with divided government, the market should have an easier time getting comfortable with whatever policy road map we’re going to get, whether it’s Trump or Biden in the White House.”
The U.S. has frequently had a divided government in the past, and “it has had the impact of limiting some of the more extreme proposals for change over that time,” analysts at Columbia Threadneedle wrote in a note Wednesday. “For some, this check on power is the preferable outcome. But given the need for additional fiscal measures to address the economic damage caused by the ongoing pandemic, an ability to work together in the coming months is essential.”
That worry over a split Congress’s ability to work together over stimulus (and pass a meaningful package) remains a headwind for markets, analysts say. But so far “Wall Street’s positive response to the yet-to-be-decided election implies that investors think gridlock is good,” wrote CFRA’s Sam Stovall on Wednesday.
