Gridlock forecast for stocks, no matter results in Georgia

By Ken Fisher
Real Clear Markets

Following America’s election, you may be blissful over
Biden’s win or terrified by Trump’s (apparent) defeat. But
cold, emotionless stocks view this election differently. The
absence of a blue or red wave leaves razor-thin electoral margins
rendering big legislative change dead on arrival. However you feel
about this-or-that race’s outcome, that’s great stock market
news.

In October, I detailed why falling uncertainty boosts stocks
after elections. Now clarity comes and stocks are jumping. Since
the vote, the S&P 500 is up 7.9%. World stocks are up more,
10.3%. The divided results ushered in a do-little government
bringing bullish relief here and abroad. In the House, Democrats
expected to increase control about 15 seats above their 232
pre-November total seats. Instead the Republicans gained at least
10 seats—with three still undecided with Republicans slightly
ahead. However they go, this will be the Democrats’ thinnest
House majority since at least World War II. If the GOP takes those
three, it will be their smallest edge since 1900. Hence, bold
legislation is a non-starter.

Ditto in the Senate. If Republicans win at least one of
Georgia’s two January 5th runoffs, they retain a slim majority.
If not, it’s a 50-50 deadlock with Vice President-elect Kamala
Harris casting the tie breaking vote for the very slimmest edge
possible.� Hence, again, minimal legislation.  The margins are
simply too thin. Moderate Democrats and so-called progressives 
already blame each other for a “Blue Wave†failing to
materialize. To pass anything partisan, both sides need effective
100% uniform support—and there is nothing controversial all
members of either party agree on. Any one or two dissenters can
kill any issue. Things will only pass with broad agreement. 
Moderate democrat Joe Manchin and Moderate Republican Susan Collins
are reportedly talking about joining forces to ensure moderation.
Gridlock rules, at least until 2022’s midterms.

Gridlock frustrates voters—who want their views to dominate,
creating change. But stocks love it. I’ve studied politics’
influence on markets for decades. One constant: In developed
country markets, stocks do best when big legislative risk is low.
Why? More clarity for executives and investors to plan. Fewer wild
cards to fret.

Legislation redistributes money, property rights, or
regulations—creating winners and losers. Behavioralism shows
people hate the pain of loss vastly more than loving equal-sized
gains. So new legislation’s losers really hate it. Others fear
they may be next to suffer. This uncertainty makes returns much
less variable when gridlock rules.

Typically, new presidents arrive touting big ideas. That is when
they have the most political capital, hoping to get the most
done—that’s why so many people talk up actions in the first 100
days. It’s also why President Donald Trump’s 2017 tax cuts came
early. Ditto for President Barack Obama’s early 2010 healthcare
overhaul. That doesn’t guarantee stocks struggle—they soared in
both Trump’s and Obama’s first years while their parties
controlled Congress. But since good data begin in 1925, US stocks
have risen in 58% and 63% of presidents’ first and second years,
respectively—noticeably behind the overall 73.7% annual frequency
of gains. Fear over policy shifts helps explain why.

Then midterms arrive. The president’s party almost always
loses relative power in Congress, ushering in gridlock on an
absolute or relative basis. Bullish! The result: Stocks have risen
in 92% of presidents’ third years and 83% of fourth years. Those
years also boast the highest median returns—22.6% for third years
and 12.0% for fourth years, both topping US stocks’ long-term
average annualized return of 10%. Now? We needn’t wait for
midterms for gridlock. We get it perfectly immediately ahead.

This all augments the repeat trend I detailed here in October.
When a Democrat wins the presidency, election-year returns are
typically tepid before the election, thanks to biases painting the
party as anti-business. But in inaugural years, stocks rebound big
as investors’ fears don’t come true and relief ensues.
(Vice-versa when a Republican wins.) It usually takes some time, as
investors need to see sweeping change isn’t coming. Said simply,
since World War II every democrat President’s inaugural year has
been double digit positive except Carter’s which was only a
negative 7.4%.  But this year? The early, golden gridlock means no
waiting—like Christmas in July.

Investors will feel that benign political backdrop increasingly
ahead—helping stocks not only at home but globally. While pundits
often highlight differences in US and non-US markets, developed
markets typically move together. Non-US developed world stocks have
a 0.85 correlation with the S&P 500 over the past 20
years—sky-high considering -1.0 is polar opposite and 1.0 is
lockstep movement.

Politics are, of course, merely one factor for stocks. But after
a tense election year, the long lasting relief gridlock provides
blows a forward wind in stocks’ sails. Take advantage now and own
stocks—at home and abroad.

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Gridlock forecast for stocks, no matter results in Georgia
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