Fisher Investments Editorial Staff
Politics, US Economy

Gridlock on the Beltway

By, 09/28/2010

Story Highlights:

  • Political gridlock has been on investors' minds lately.
  • As we've said, political gridlock is typically good for markets.
  • S&P 500 returns have historically trended almost uniformly positive after midterm elections—and that pattern will likely continue this time around.

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Gridlock is a commuter's worst nightmare, but it's political gridlock (and its pluses and minuses) that's been on investors' minds of late—and in our opinion, gridlock on the Beltway is a good thing (as we've said before). As the November midterm elections loom, it appears more likely the Democrats' power will wane significantly, as usually happens to the majority party in midterm elections. No surprise there—the majority can't shield itself from criticism (be it about health care reform, jobs, etc.). Some of that criticism is warranted, and some undoubtedly isn't. But warranted or not, the party in power tends to suffer the brunt of their constituents' frustrations. After all, who was just in charge? The stronger the majority, the fewer excuses come the election.

True to form, polls indicate voter angst is aimed mainly at the Democrats this time around. The end result? The Democrats likely lose power but retain a weak majority in one or both houses—or the Republicans steal a weak majority in one or both houses. Should the Republicans eke out a majority, don't forget there's still a veto-wielding Democrat in the White House (who, incidentally, likely won't be quite as motivated to shake things up in the second half of his term if he turns his sights on re-election).

We don't know what the exact outcome will be, but none of the most probable scenarios make for an active Washington. And less legislative uncertainty is good for stocks going forward—historically, post-midterm election returns tend to bear that out. S&P 500 returns 6 months out after midterm elections trend almost uniformly positive, averaging a 15% return since 1934. And looking 12 months out, the trend holds, averaging a 21% return since 1934. There were two negative 12-month returns in 1938 and 1946, but there hasn't been a negative 12-month period after midterms in over 60 years.*

So rather than moan and groan as commuters do when faced with nasty traffic jams, investors should cheer a bumper-to-bumper Beltway—if history is any indication, increased gridlock should bode well for stocks.

*S&P 500 Total Return Index, Global Financial Data, Inc.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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