Election 2018 Is Bad for Stocks
For election 2018, American voters have chosen a divided government.
The Republicans will control the Senate. The Democrats will control the House.
That doesn’t happen often. We have only seen the House majority switch eight times since 1896.
So what does it mean for investors?
I didn’t know. So I starting crunching some numbers.
The answer surprised me…
Most people believe the stock market performs best during a divided government. Washington gridlock, the general thinking goes, is good for business.
Not much gets done. Fewer regulations get passed. In theory, that means good things for Wall Street.
At least, that’s what I thought. The numbers paint a different picture.
Surprisingly, a divided house throws conventional wisdom out of the window.
Take a look at the actual stock market returns since 1896 when the House majority switches.
| Election Outcome |
One-Year Average Return |
| House Majority Unchanged |
14.6% |
| House Majority Switch |
6.1% |
| Republicans Lose House Majority |
-4.1% |
(Source: Yahoo! Finance, last accessed November 7, 2018.)
These results look terrible. Whenever the House majority switches, stocks only post a positive return 63% of the time over the following year. Worse, equity returns tend to lag the long-term average.
It gets worse when Democrats get into office…
When Republicans lose the House majority, stock prices get clobbered. It beats the widely held notion that bipartisanship represents good news for equities.
And that makes sense when you think about it.
When one party has full control over the government, it gives investors clarity on future policies. We have a sense of which bills Congress will pass and which will be blocked.
And investors love certainty. Investors will opt for certainty even if some of the policies go against business.
Of course, we have a limited dataset here. Republicans only lost the House majority four times during my study period. Still, it provides an interesting insight into how things will play out over the next few years.
So how does this impact you right now?
Investors are in hog heaven nowadays. President Donald Trump’s tax cut has lit a fire underneath the stock market.
History offers a different perspective: Get ready for trouble.
Today’s headlines are all about “election 2018.” But the bigger story could play out in the financial world. If we can use history as a guide, a divided house means poor returns for shareholders.