The media projected a blue wave. Instead, American voters delivered a purple haze. Although there are still lingering pieces of this election with runoffs, recounts and lawsuits alike, one thing is fairly certain from Tuesday’s vote. We’ve voted in government gridlock.
Yes, there is a possibility for some of this to change, but it looks as though we have a Republican Senate and Democratic House. Regardless of who resides in the White House for the next four years, a split Congress will prevent any large-scale policy changes from happening over the next several years. That means no big tax changes and no dramatic shifts in health care. Any sweeping political changes will have to be bipartisan, which will most likely result in a very limited docket of new legislation.
Following Election Day, the message from markets was quite simple: “Excuse me, while I kiss the sky.” Stocks rallied in a relatively significant fashion as they cheered at signs of a gridlocked government and no major policy changes on the horizon.
For investors, gridlock, at least historically, has been good. Actually, very good. Let’s take a stroll down history lane and review what different political combinations in Washington have meant for stocks, and what today’s most likely four-year combination might mean as well.
Spoiler Alert: While different political regimes result in different market outcomes, the differences are slight — and they are all pretty darn good.
Of course, past performance is not always indicative of future results, but we will let history from the past near century be our guide.
Here’s 86 years of S&P 500 performance alongside various political scenarios.
1. Blue Wave: Democratic Congress and Democratic president? Average S&P 500 return: 9.3%
2. Red Wave: Republican Congress and Republican president? Average S&P 500 return: 12.9%
3. Split Congress and Republican president? Average S&P 500 return: 8.77%
4. Split Congress and Democratic president? Average S&P 500 return: 13.6%
Where will we end up in 2021? Most likely option No. 4. Which as you can see has actually delivered the best average annual market returns of any political combination.
Why? Again, gridlock is good.
Both large and small businesses shudder at the thought of large and looming policy changes. Will taxes go up? Will health care legislation be repealed? Will dramatic new regulations impact my industry? This kind of sweeping legislation can only be accomplished with bipartisan support or a lopsided government.
At least in some cases, I do think we will see both parties work together in the coming years. For one, there is bipartisan support for a new economic relief package due to the COVID-19 pandemic. The question is more about the scale and timing. $1 trillion or $2 trillion? This month or late January?
But when it comes to larger and more controversial issues like corporate tax hikes, personal tax increases, and health care, without a lopsided government, very little is likely to change.
While as an investor I’m excited to see this purple haze fall over the United States, ultimately my driving reason for putting money to work in the stock market and the U.S. economy has not changed this November. Regardless of what Congress does over the next four years, my money is on the American worker, not a political party.
As much time and mental energy have been spent wrangling over this election, in the end, it’s not Washington that propels the American economy. Washington might steer the economic ship in some ways, but the majority of the thrust and progress is tied to a much more powerful and immutable force. That force is the American worker.
Every day in the U.S., 150 million U.S. workers wake up with the goal to feed and shelter their families. We make sales calls, hammer nails, perform surgeries, and teach algebra to pay the mortgage, fund retirement, support charities, and put our kids through college. We buy an occasional steak dinner or new toy and put money back into the economy. And our country’s biggest companies — like those in the S&P 500 — provide the means for millions of these workers to do this.
Whether leaders at 1600 Pennsylvania Ave. run red or blue, the American worker wakes up and works. I call it “The Army of American Productivity”; it is slow, steady and relentless. The collective push drives our nation’s companies and, in turn, the most powerful economy in the world.
Do I think there’s an optimal political mix to get the most out of our industries?
Of course.
Do I want the government to stay out of the way of good businesses?
Yep.
But I’ll still sleep well tonight — and will continue to invest my money in the U.S. stock market. Because no election, stimulus package, pandemic or party can slow the relentless grind of the American dream.
Wes Moss has been the host of “Money Matters” on News 95.5 and AM 750 WSB in Atlanta for more than 10 years now, and he does a live show from 9-11 a.m. Sundays. He is the chief investment strategist for Atlanta-based Capital Investment Advisors. For more information, go to wesmoss.com.
DISCLOSURE
This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. There will be periods of performance fluctuations, including periods of negative returns and periods where dividends will not be paid. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment adviser before making any investment/tax/estate/financial planning considerations or decisions. Investment decisions should not be made solely based on information contained in this article. The information contained in the article is strictly an opinion and for informational purposes only and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing.
