CONGRESSIONAL GRIDLOCK AND THE MARKET
Last month, the US inaugurated a new Presidential administration and a new Congress. Though Democrats now control both the Executive and Legislative branches, the party’s advantage is narrow in each chamber of Congress. As we transition to a new political regime, I wanted to take a quick look at the possible relationship between market returns and concentration of political power (without focusing on a particular political party). I am hoping to put together a series of posts looking at the relationship from different angles, with this first one focused on potential implications for public equities.
Figure 01 below plots the S&P 500 returns against “party division”: the % difference between the country’s two largest parties. Orange dots represent periods in which the President belonged to the party that held the House; blue dots, the opposite. For the S&P 500 results, I just took the 2-year price change that roughly corresponded with each session of Congress, using year-end for simplicity. In other words, the most recent data point, corresponding to the 116th session of Congress, used the price change in the S&P 500 from December 31, 2018, to December 31, 2020.
FIGURE 01 - GRIDLOCK AND THE MARKET
(December 1930 - December 2020)
Sources: First Quadrant, L.P., Yahoo! Finance, the US House of Representatives Archives, and the White House Archives
Apparently, there isn’t too strong a contemporaneous relationship between party division and the S&P. The correlation between the two is about 6%, but that result is strongly influenced by the point in the top left, which corresponds to the 73rd session of Congress in 1935-36, when the country was coming out of the Great Depression. When you remove that point, the correlation shifts to -14%, indicating that the market generally fared better when return leadership was narrow.
Adding in just one more factor, we can also consider the interactive impact of the Presidency. In general, the market has fared marginally better when the President belonged to the minority party in the House. The market’s strongest advance occurred in 1935-6, but the next 6 strongest advances came when the President was of a different party than House leadership – thrice when a Democrat was President and Republicans held the House, and thrice the opposite. Additionally, the median S&P 500 return is 16% when the President belonged to the majority, and 19% otherwise. That being said, when the President has belonged to the majority party, as will be the case for the next two years, markets have generally performed better when the party’s leadership in the House is narrow. Again omitting the outlier in the top-left, the correlation is about -10%, meaning that the smaller the partisan divide, the larger the market return.
Obviously, correlation isn’t causation, and I haven’t touched on a slew of variables relevant to the financial-political ecosystem (e.g. war, asset bubbles, political climate). It’s entirely possible, though, that while “gridlock” has a negative connotation for many, narrower margins of power may increase both the quality of legislation and accountability.
For index definitions and trademark language used in this publication, please visit https://www.firstquadrant.com/index-definitions for further information.
Past results are not indicative of future investment results. Commodities trading involves substantial risk of loss.
© First Quadrant, L.P. 2021. Intended for Institutional and Qualified Eligible Persons Use Only. The views expressed are the views of First Quadrant, L.P. only as of the date shown and are subject to change without notice based on market and other conditions. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice, recommendation, or solicitation of any particular security, strategy or investment product. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of domicile. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.