"A divided congress is good for stocks" is something that's repeated after every election.
Historically, it has some backing and intuitively it makes some sense because it limits change. At the same time, it's not infallible and it's a flimsy investment thesis in a world with so many moving parts that's far more correlation than causation.
Think back to the 2020 election. November of that year was a sensationally good month and that continued into December. Many pundits were on TV saying it was because Democrats hadn't taken the Senate. However it hadn't been fully decided yet and there was a runoff vote in early January in Georgia to decide control.
Oppenheimer strategist John Stoltzfus wrote this just before that pivotal vote:
"Should the Democrats win both seats, we expect the S&P 500 to become vulnerable to a downdraft in the neighborhood of 6% to 10%," wrote Stoltzfus in a note to investors.
"In our experience the markets prefer that Washington's Capitol Hill have enough checks and balances in place to keep political power out of just one party's hands," he added.
A Democratic Senate sweep "would bode ill for business with the likelihood that corporate tax rates could rise substantially," Stolzfus said.
In response, I wrote that "I disagree completely" and laid out the case for why profligate Democratic spending would offer a boost to stocks.
It was a completely out-of-consensus call at the time. What happened? The S&P 500 gained 27% in 2021 after a Democrat won the runoff.
It's not enough to just say one party controls this or that. I correctly sniffed out that Senate Democrats would never unanimously support a corporate tax hike and would spend heavily, including more consumer giveaways.
So what about this time? I don't have a strong read on what Republicans will do with the House and the Senate but either way, I don't see any meaningful legislation being passed. I have to assume that's already baked in.
So where does that leave us? There are still much bigger problems to confront around inflation, recession, war and energy. And I don't think any setup in the US government can fix them any time soon.
As for the pundits who will make stock market predictions based on tomorrow's results? Ignore them.
Stocks work in the long term but if it were as easy as buying a divided congress and selling a sweep then managing money would be much easier.
