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Why breaking up is good: U.S. election may again render divided government

Why breaking up is good: U.S. election may again render divided government

James D. Ragan, CFA – Director of IIG Research

With less than a month to go in the 2016 presidential election cycle, Democratic candidate Hillary Clinton remains ahead in the polls and holds at least a 7-point lead over Republican candidate Donald Trump, according to RealClearPolitics. We believe that U.S. equity markets are anticipating a Clinton victory and a split Congress, where Republicans retain control of the House of Representatives, and Democrats, in a close call, could regain control of the Senate.

The situation of both parties controlling at least one of the three elements of the presidency and Congress is very common, and has existed 60% of the time since 1945. One party has controlled all three 40% of the time, most recently in 2009 and 2010, the first two years under President Obama. Given the likelihood of a Clinton victory, it is interesting to examine how the U.S. equity markets have performed under different party leadership over the years.

We analyzed party leadership since 1945 — a span of 72 years and 12 presidents. Including this year, both Democrats and Republicans have held the presidency for 36 years. From an equity price return perspective, the S&P 500 index has gained an average of 11.1% annually under Democratic presidents, and 6.3% annually under Republicans, as seen in the summary chart below. However, the numbers have changed somewhat when overlaying congressional party affiliation. When Republicans held all three offices (President, House and Senate), the S&P 500 has gained 11.0%; when Democrats held all three the market has gained 9.8%. This suggests that singular party control has been good for equity markets overall. The best annual market performance has come from a Democratic president and Republican control of the House and Senate.

The numbers can be analyzed in several different ways, but we conclude that historically U.S. equities have produced solid annual gains over time with either Democratic or Republican leadership. The S&P 500 has performed better with a Democratic president, although the best returns have come when Republicans have controlled both the House and Senate, regardless of which party holds the presidency.

What is the bottom line for portfolios?

A divided government makes sweeping change less likely. U.S. economic growth and corporate earnings will be a much larger driver of investment performance, in our view. We are positive on the U.S. economy and believe the current equity bull market can continue.

S&P 500 Average Annual Price Returns (1945-2015)

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Sources: FactSet, www.house.gov, www.senate.gov, RealClearPolitics, FiveThirtyEight

Information contained herein has been obtained by sources we consider reliable, but is not guaranteed and we are not soliciting any action based upon it. Any opinions expressed are based on our interpretation of the data available to us at the time of the original publication of the report. These opinions are subject to change at any time without notice. Investors must bear in mind that inherent in investments are the risks of fluctuating prices and the uncertainties of dividends, rates of return, and yield. Investors should also remember that past performance is not necessarily an indicator of future performance and D.A. Davidson & Co. makes no guarantee, expressed or implied to future performance. Investors should consult their financial and/or tax advisor before implementing any investment plan.

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