Political Gridlock Good for Markets? Another Common Theory Debunked

Stock markets love gridlock. This is what one would think after listening to investment pundits in the media. The thinking goes that markets hate uncertainty and with gridlock in Washington very little actually gets done, eliminating fears of new, unexpected legislation. However, a quick look at the numbers show that this theory is completely wrong.

Sam Stovall of Standard and Poor’s looked at historical U.S. stock market returns under three political scenarios, “unity” (one party controlling the presidency and both houses of Congress), “partial gridlock” (one party holding the presidency and another controlling Congress), and “total gridlock” (a split Congress). The results since 1900 show that the stock market actually hates gridlock. How this stuff gets repeated so often in the financial and political media is beyond me.

Annual Stock Market Returns Under Three Political Scenarios (Source: S&P)

Since 1900:     Unity +7.6%       Partial Gridlock +6.8%     Total Gridlock +2.0%

Since 1945:     Unity +10.7%     Partial Gridlock +7.6%     Total Gridlock +3.5%

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3 Thoughts on “Political Gridlock Good for Markets? Another Common Theory Debunked

  1. Traciatim on November 2, 2010 at 12:16 PM said:

    I’d really like to see the results a little more granular as in Unity Party A vs Unity Party B, Partial Party A.P Party B.C vs Partial Party B.P Party A.C, and Gridlock Party A vs Gridlock Party B in presidency. Now that woudl make things interesting.

  2. flipper on November 3, 2010 at 1:36 AM said:

    Thanks for interesting study. It would be great to get a more detailed analysis.

  3. Gee, use your heads people…if not then at least use Google…”Sam Stoval gridlock”


    My only thing is I’ve never hear the phrase before.
    To me the argument that WS likes stability is still standing because you can’t have more political stability in a gridlock than in a total unity.

    The results only support that.

    And all that leads to the logical conclusion that even in a total unity no sudden referms are happening , at least not ones that Wall Street cares about.

    And why would they when they practically own the congress 🙂

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