Forget the stoppage, the republican gain may be better for stocks


SAN FRANCISCO (Reuters) – US President Donald Trump has warned that his favorite hit, the stock market, is at risk if voters favor Democrats in next week's congressional elections.

Traders work on November 1, 2018 in New York, USA, on the New York Stock Exchange (NYSE). REUTERS / Brendan McDermid

While not exactly – stocks tend to rise regardless of who controls the government – it turns out that the market is performing slightly better on average when the Republicans dominate Washington.

A Reuters analysis over the past half century shows that stock prices in the two calendar years after the congressional elections, when the Republicans controlled Congress and the presidency, performed better than at the time when the Democrats controlled the two branches, at least Times of stoppage. Many investors are now hoping for a continuation of the republican agenda.

"There is Trump" the person "who is very controversial," said Stephen Massocca, senior vice president at Wedbush Securities in San Francisco. "And there is Trump" the agenda. "The Trump agenda loves the stock market, and if it continues like this, the market will like it."

Republicans have traditionally relied on business measures, such as tax cuts and deregulation, to raise stock prices. The market has boosted Trump overall, and the market has risen by almost 20 percent during his previous presidency.

Surveys show that the Democratic Party could gain control of the House of Representatives on 6 November after the two years it did not have practical political power in Washington, and the Republicans would probably hold the Senate.

Trump warned in a tweet Tuesday that changing the Congress would be bad for the market. He said, "If you want your stock to fall, then I strongly recommend that you vote for the Democrats."

Investors often favor Washington's stalemate because it preserves the status quo and reduces uncertainty.

"Traditionally, a shutdown is good for the markets. But I find this choice very difficult. I am not sure that this is the preferred market result as many of the benefits of the past two years have come from not being in a jammed environment, "said Mike O & Rourke, Chief Market Strategist at JonesTrading.

Should his republicans maintain or expand Congress, Trump can be encouraged to pursue more of his political agenda, including further tax revisions.

In contrast, democratic achievements that allow the party to control the House of Representatives and possibly the Senate could stifle Trump's political goals and possibly lead to attempts to blame him. It could also lead to resistance to raising the government's debt ceiling next year.

"Our economists believe that two likely consequences of a split Congress would be an increase in investigations and uncertainty about tax periods, which could increase stock volatility," Goldman Sachs said in a report this week.

For the past 50 years, Washington's stalemate has been the norm, not the exception, with the presidency and congress won by only one party in just seven out of 25 congressional elections.

GRAPHICS: Wall Street and Washington – tmsnrt.rs/2P57hRu

Looking at the two calendar years after each congressional election, the S & P 500 recorded an average annual increase of 12 percent among Republican-controlled governments, compared with a 9 percent increase in Democrat-controlled governments and an increase of 7 percent in blocked governments.

However, the differences are less clear on average averages that exclude outliers: the S & P 500 has seen annual gains of 11 percent among Republican-controlled governments and standstill and Democratic-controlled governments by 10 percent.

An analysis of the BTIG mediation of data from 1928 also indicates that blocking is not necessarily ideal. It showed that US equities underperformed in the United States.

"State control is by no means the only determinant of market development, but investors clearly prefer a unified regime," wrote BTIG strategist Julian Emanuel in his report.

Interest rates, economic growth, corporate earnings and inflation are widely considered to have a strong impact on stock prices. The balance of power in Washington is only one of many factors that influence investor sentiment.

Two Democratic presidents – Bill Clinton and Barack Obama – were in the lead, with a gain of 208 percent and 166 percent over the strongest S & P 500 appearances since 1952 (tmsnrt.rs/2jtEpzi).

Wall Street has been applauding Trump since it came to power in January 2017 and has rapidly taken measures to deregulate banks and other companies. Last December, its Republican party issued sweeping corporate tax cuts, with which S & P 500 companies are on track this year to increase their earnings per share by more than 20 percent. This is the biggest jump since 2010, according to Refresh IBES data.

"Volatility may increase regardless of earnings, but historically, equities may increase if Republicans succeed in retaining control of Congress," Deutsche Bank said in a recent report.

Reporting by Noel Randewich; Arrangement of James Dalgleish

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