The statistics on divided government are mixed. The Christian Science Monitor analyzed the performance of stocks between 1975 and 2009 and found that they do best with a Democratic president and a Republican House (+19.5% compared to +4.8% when Democrats control all three branches).
But Sam Stovall, chief investment strategist for Standard & Poor's Equity Research Services, has found that divided government doesn't matter much for the stock market. Using three basic political scenarios, Stovall studied how the S&P 500 ($SPX) did from 1900 to 2010. The scenarios were:
- Total unity (one party controlling the House, Senate, and White House)
- Partial gridlock (one party controlling both houses of Congress and the other controlling the White House), and
- Total gridlock (a divided Congress).
So stocks rose in all three scenarios. The only problematic scenario appears to be total gridlock, though even in that situation stocks showed positive growth. Given that heightened intra-party combat is a possible outcome of the 2010 elections, it's worth considering the lower returns associated with total gridlock -- but it hardly seems like a decisive factor.
The White House Effect
If the data on divided government is mixed, the effect of which party holds the White House is clearer. Going back to 1927, the UCLA professors found that the S&P 500 average total return (including dividends) was 14.1% per year under Democratic presidents and 11.8% under Republican presidents.
Here is Forbes' 2004 list of presidents and the S&P's 500 average total return while they were in office:
- Bill Clinton (+17.4%)
- Gerald Ford (+17.0%)
- Harry Truman (+15.6%)
- Dwight Eisenhower (+14.9%)
- Ronald Reagan (+14.4%)
- George H. W. Bush (+14.4%)
- John Kennedy (+12.4%)
- Jimmy Carter (+11.2%)
- Lyndon Johnson (+10.2%)
- Richard Nixon (0.6%)
- George W. Bush (-4.5%)
- Barack Obama (so far) (+26.9%)