Equity Market Returns During "Gridlock"

In the spirit of not letting the results of the most recent mid-term elections pass us by, I wanted to look at what happens to our markets when the congress is split and when it is in line. 

Before we get into the results let me start by describing the data.  My data set is annual from 1945 to 2009, and therefore, not as large as I would like it to be.  According to about.com, only nine years during that time have seen a split congress (gridlock). Fifty-six years have seen the same party control both the house and the senate.  Now the results.

The first chart compares the first nine years of cooperation in congress against all of the nine years in which congress was in gridlock.  The results of investing one dollar in each circumstance would result in better success during the time of both parties controlling one congress.  Again, due to small data sets, take all of these results with a grain of salt.  Through seven of the nine years, gridlock returns were higher than coop returns, with the years 2000 and 2001 greatly affecting the results.  What you cannot see (because I did not include the table) is how short periods of gridlock tend to last.  The longest period of gridlock is from 1982-86, and the only other two occurrences are from 1953-54 and the aforementioned 2000-01.

The second chart shows the annualized return over all fifty-six yers of split congress vs. that of the nine years of gridlock.  We see little difference between times of split congress and those of same party occupancy.  When congress is split we do see higher returns, but when we ran the regression, this t-stat was so puny it wasn't worth mentioning. 

So what should we take?

1) Political control is not necessarily the driving factor for equity market returns.  Much more prevalent are unemployment, GDP, sentiment, and corporate earnings.  So when planning allocations, you should probably worry more about monetary policy and underlying fundamentals. 
2) Don't expect the gridlock to last.  The average number of years that congress remains in gridlock is three.  I am willing to bet that regardless of who comes out on top during the next election, someone will come out on top.  When you really think about the period of time we are in, that estimate is not too hard to explain.  I believe that Republicans have actually put themselves in a tough situation.  When everything is said and done (two years from now) the blame will be placed on the republicans.  If they have turned things around then we are likely to see Mr. Obama unemployed, as well as Republican control of house and senate.  If things stay the same or worsen, I think we can expect to see re-election, and the democrats retaking the house.

Kevin