Myth Busted: "Divided Governments Are Best For Markets" by Zak Gardezy, CFP®

Over the years, many analysts and pundits have asserted that “a divided government is best for markets.” This belief stems from the idea that a divided government—where different parties control the Congress and the Executive Branch—leads to legislative gridlock, reducing uncertainty. Additionally, it is believed that a divided government can moderate against extremist policies, and the checks and balances can boost investor confidence.

However, the historical data tells a different story. Analyzing S&P500 returns from 1926 to 2023, we find:

  • Unified Republican Government (President and Congress): 13 years: S&P 500 average annual return of 14.52%

  • Unified Democratic Government (President and Congress): 36 years: S&P 500 average annual return of 14.01%

  • Divided Government with Republican President: 34 years: S&P 500 average annual return of 7.33%

  • Divided Government with Democratic President: 15 years: S&P 500 average annual return of 16.63%

These numbers suggest that a divided government doesn’t necessarily result in the best market outcomes. In fact, the data indicates that unified governments have historically provided stronger market returns, with an average annual return of 14.15% compared to 10.18% under divided governments.

According to the latest polls, the Presidential, House, and Senate races are extremely close. President Trump currently leads President Biden in the polls by a narrow margin (43.7% to 43.3%). The House and Senate races have many toss-up seats that will ultimately decide the balance of power. Notably, third-party candidate RFK Jr. is having a significant impact on the election, potentially being one of the most influential third-party candidates in history. If RFK Jr. were to drop out and endorse a major candidate, it could be a game-changer, although this seems unlikely at the moment.

What Should You Do With Your Investment Portfolio?

The answer is, “It depends.” It depends on your stage of life and financial goals. Are you in growth mode and accumulating wealth? Are you planning on retiring soon, or already retired and looking to approach this election cautiously? Are you managing significant wealth and considering the potential tax and estate planning law changes that will be determined by the election outcome?

As the data shows, there isn’t a clear action to take during an election year, except that going to cash may not be advisable. The 10.18% average return under divided governments is still an excellent return, and better than current money market yields.

One sector that seems poised to continue its growth regardless of the election outcome is mega-cap tech, specifically artificial intelligence (AI). Both candidates have discussed AI, with President Trump calling it a “superpower” with potential risks. Recently, on the "Impaulsive" podcast with Logan Paul, President Trump recounted a story about one of his writers utilizing AI to craft a speech, which he then delivered at an event. President Biden discussed A.I. at the G7 meetings last week, where world leaders and the Pope discussed setting international ethical and safe use standards.

Many other factors will shape the markets for the remainder of 2024, such as inflation, potential rate cuts, and geopolitical issues. While the Presidential election will be important, it should not be the sole basis of your investment strategy.

I recommend meeting with a financial advisor who can analyze your specific situation and suggest portfolio adjustments to help you prepare for what’s to come.

Please don't hesitate to reach out with any questions.

Sources:

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Artificial Intelligence: Catalyst Behind The Fourth Industrial Revolution by Zak Gardezy, CFP®