For anyone invested in the stock market, the mid-term elections last week created a roller coaster effect in many portfolios. Democrats sweep the elections and next day stocks skyrocket. Next couple days they plummet to a historical worse drop. And now the last two days we are recovering nicely. Can you figure it out? I certainly can’t….but those are the times to buy when everyone else is panic selling!
What does the near future look like? Nobody can predict that. We can only read the tea leaves and see what history has shown us time and again. In the short term, here is what we know:
The Reality of Political Gridlock
With Democrats taking over the House and Senate under a Republican presidency, Washington enters a phase of political gridlock.
Historical Returns: Historically, the S&P 500 performs exceptionally well under a divided government, with historical averages showing the index finishes higher 100% of the time six months post-midterms (averaging a 14.18% gain).
High Predictability: Split governments restrict the passage of sweeping, unpredictable reforms or tax hikes. This allows investors to price in long-term company assets without fearing abrupt legislative interference.
Here is some more information:
According to a multi-decade dataset evaluated by RBC Wealth Management, the average annual returns of the S&P 500 vary noticeably depending on the specific alignment of the White House and Congress:
- Democratic President with a Split Congress: +17.0% average annual return
- Democratic President with a Republican Congress: +16.3% average annual return
- Democratic Sweep (White House & both chambers): +8.0% average annual return
- Republican Sweep (White House & both chambers): +13.3% average annual return
Does any of this truly predict anything? Maybe not…but doesn’t hurt stay informed in the event history repeats itself.
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