Some Good Midterm News: The Stock Market Likes Political Gridlock

The American stock markets have all opened with gains this morning and the Economist reports this is likely due to the wave of GOP victories in the midterm elections. Republican candidates took seven Senate seats, fourteen House seats, and a number of governorships. Generally, stock markets prefer lower taxes and reduced business regulation, positions traditionally taken by the Republican party. But a look at the political history of the executive and legislative branches paints a complex portrait of how elections affect the economy.

Under Democrat Presidents, the average annual stock market gain has been 11.2%. Under Republican Presidents, just 2.7%. But the current conditions, a Democrat President with both chambers of the legislature opposing him, have proven the most favorable since 1926 for stock market growth, averaging an annual gain of 13.2%. The worst periods for the stock market have been under Republican Presidents facing Democrat opposition in one or both legislative chambers, measuring an annual growth rate of -0.2% and 1% respectively.

When a single party controls the executive and the entire legislature, economic growth averages about 10%. So while unanimity is strong, our current gridlock is even stronger, at least speaking of historical stock market gains.

Columbia Law School professor Michael Heller argues that gridlock can sometimes be a good thing when it comes to governance because it forces the country to take the middle way, rather than overreacting with fast changes to policy: