Stock markets are more concerned with the composition of Congress than with the winner of the presidential elections

Many investors tend to overestimate the impact of the U.S. presidential elections on the stock markets. It’s easy to fall into the trap of this great spectacle that raises passions and exacerbates polarization, even outside its borders.

Of course, many analysts agree that the current uncertainty may be a factor of short-term volatility. At the time of publication, Trump has not yet conceded.

But in the long term, the political allegiance of the occupant of the White House doesn’t seem to be a determining factor on the share price of publicly traded companies.

The advantage of a divided Congress for investors

If we look at the performance of the S&P 500, it’s the composition of Congress that we must turn to in order to hope for upward stock market predictions. At least that’s what the historical data indicate.

From 1950 to 2020, the periods when power in Congress was divided between Republicans and Democrats seem to have been the most favourable for the stock market. When both parties share control of the Senate and House of Representatives, the S&P 500 performs very well with an average annual return of 17.2%.

What could explain this good performance?

Since the famous “checks and balances” of American politics are more pronounced when power is shared, neither party can impose its will. This greatly reduces the likelihood of overly drastic policies and measures in either direction. One could infer from this what we already know: stock markets are fond of predictability.

When the Republican Party controls both houses, the average annual return since 1950 has been around 13.4%. The return on the stock market index drops to 10.7 percent when the Democrats are in control of Congress.

At the time of publication, Democrats control the House. Results in Georgia are still pending on whether Republicans will retain control of the Senate.

In the White House, we notice the opposite trend, with a slight advantage for the Democrats. Since 1976, the S&P 500 has outperformed (14.3%) when the President is a Democrat. It’s 10.8% when the President is from the GOP.

A lesson for investors?

You have to take all this with a grain of salt. Correlation is not always a sign of causality. So you don’t change your investment strategy depending on who occupies the White House, but yes, you can afford more stock market optimism when Congress is divided.

However, the past is no guarantee of the future.

The two major American parties change and evolve at an uneven pace over time. American politics is currently going through a period of unprecedented change. The ideas that have galvanized Trump’s supporters since 2016 are quite different from those advocated by Bush’s neoconservatives at the turn of the millennium. Among the Democrats, Biden’s American-style centrism stands in stark contrast to the proposals of his party faction led by the young representative Ocasio-Cortez.

What about Bay Street?

Many experts expect a warming of Canada-U.S. relations under a Biden presidency. Whether this will truly benefit Canadian industries that are strongly linked to the U.S. economy and the TSX, only the next few months will tell.

In the meantime, investors can take advantage of the incredible show these elections offer, but they have no reason to rethink their long-term planning.