A Divided U.S. Government—Who Wins?

It’s certainly been a November to remember, and we’re only halfway through the month!

The major headlines, of course, have centered on the 2020 Presidential election, which certainly lived up to expectations. Bloomberg reported that approximately 161 million Americans cast their vote or nearly 67% of registered voters. That’s the best voter turnout in 120 years.[1]

Even with the record number of voters, the Presidential election was far from cut and dry. Joe Biden was named the President-elect by the media on November 7 when he captured the electoral college votes in the battleground state of Pennsylvania. But President Donald Trump has yet to concede, as he is filing lawsuits and demanding recounts in several states with narrow margins, including Pennsylvania.

Even with all the drama and uncertainty surrounding the Presidential election, Wall Street has been in a very, very positive mood this month. The S&P 500 and Dow have both rallied to new all-time highs, with the S&P 500 tacking on nearly 8% and the Dow soaring 10% in November so far.

Yes, the positive COVID-19 vaccine news on November 9 added to these recent gains, but the real reason for the November market surge is that Wall Street is looking forward to a divided U.S. government and gridlock in Washington, D.C.

While there are run-off elections in Georgia and votes still being counted in other states, it looks like Republicans will maintain control of the Senate and the Democrats will remain in control of the House. A divided government is viewed as a positive for the stock market, and based on the recent action, investors are betting that will be the case this time around, too.

Interestingly, though, we’re actually in unchartered waters. With data back to 1928, there isn’t a time when the Democrats controlled the White House and House of Representatives, while the Republicans controlled the Senate. That’s the anticipated scenario for 2021, so it’s anyone’s guess how the situation will play out on Capitol Hill.

But, with that said, we can look back to how the stock market reacted to other years of gridlock when power is divided between Democrats and Republicans. Based on the chart below,[2] the stock market performed the best with a Democratic president and a split Congress—and that has Wall Street excited as we head into 2021.  This “fact” does not answer the question: why? But those are the numbers.

The reality is that a divided government is going to make it a lot harder for new policies and policy changes to be passed. Investors are now optimistic that the corporate tax cuts the Trump Administration implemented will remain, that there won’t be a sweeping overhaul of the government healthcare plans from the Obama era, and that technology companies are no longer facing regulatory pressures. As a result, technology and healthcare stocks have led the market higher in November.

Nobody can predict the future, but history can be a precursor to what happens next. At least in the near-term, Wall Street is bullish and cheering gridlock in Washington, D.C.

If you would like to discuss how Washington politics can impact your portfolio in the future, please give me a call.

Please click here for important disclosures.

[1] https://www.townandcountrymag.com/society/politics/a34574744/2020-election-voter-turnout-high/

[2] https://www.cnbc.com/2018/11/05/market-history-shows-investors-should-hope-for-gridlock-on-election-day.html