November 4, 2018 / 6:00 PM / in 9 months

RPT-Wall St Week Ahead-Forget gridlock, Republican win may be better for stocks

 (Repeats Friday story with no changes)
    By Noel Randewich
    SAN FRANCISCO, Nov 2 (Reuters) - U.S. President Donald Trump
has warned that his favorite measure of success, the stock
market, is imperiled if voters favor Democrats in next week's
congressional elections.
    While not fully accurate - stocks tend to rise regardless of
who controls the government - it does bear out that the market
has delivered a slightly stronger performance on average when
Republicans dominate in Washington.
    A Reuters analysis of the past half century shows stocks
fared better in the two calendar years after congressional
elections when Republicans control Congress and the presidency
than when Democrats controlled the two branches, and at least as
well as during times of gridlock. Many investors are now hoping
for a continuation of the Republican agenda. 
    "There is Trump 'the person', who is very controversial,"
said Stephen Massocca, Senior Vice President at Wedbush
Securities in San Francisco. "And there's also Trump 'the
agenda'. The Trump agenda, the stock market loves. To the extent
it continues, the market will like that."
    Republicans traditionally push pro-business policies such as
tax cuts and deregulation, which boost stock prices. The market
has, on the whole, given Trump a thumbs-up, with the market
rising almost 20 percent during his presidency so far.
    Polls show strong chances that the Democratic Party may win
control of the House of Representatives in the Nov. 6 midterm
elections after two years of wielding no practical political
power in Washington, with Republicans likely to keep the Senate.
    Trump warned in a tweet on Tuesday that a change in Congress
would be bad for the market, saying: "If you want your Stocks to
go down, I strongly suggest voting Democrat."
    Investors often favor Washington gridlock because it
preserves the status quo and reduces uncertainty.
    "Traditionally, gridlock is good for the markets. But I
think this election is very tricky; I'm not sure that's the
preferred market outcome because a lot of the benefits of the
past two years have come from not being in a gridlock
environment," said Mike O'Rourke, Chief Market Strategist at
    Should his fellow Republicans maintain or extend their grip
on Congress, Trump may be emboldened to pursue more of his
political agenda, including further tax overhauls.
    By contrast, Democratic gains that allow the party to
control the House of Representatives, and possibly the Senate,
could stifle Trump's policy aims and perhaps lead to attempts to
impeach him. It could also lead to resistance to increasing the
government's debt limit next year.
    "Our economists believe that two likely consequences of a
divided Congress would be an increase in investigations and
uncertainty surrounding fiscal deadlines, which could raise
equity volatility," Goldman Sachs said in a report this week.
    Over the past 50 years, gridlock has been the norm rather
than the exception in Washington, with the presidency and
Congress won by one party in just seven out of 25 congressional
election years.
    Looking at the two calendar years following each
congressional election, the S&P 500 had a mean annual increase
of 12 percent under Republican-controlled governments, compared
to an increase of 9 percent for Democrat-controlled governments
and a 7 percent rise for gridlocked governments.
    However, using median averages, which exclude outliers,
differences are less clear, with the S&P 500 seeing annual
increases of 11 percent under Republican-controlled governments
and under gridlock, and 10 percent gains under
Democrat-controlled governments.
    An analysis by BTIG brokerage of data going back to 1928
also indicates gridlock is not necessarily ideal. It showed U.S.
stocks performing better under united governments.
    "While government control is by no means the sole
determinant of market performance, investors clearly favor a
unified regime," BTIG strategist Julian Emanuel wrote in his
    Interest rates, economic growth, company earnings and
inflation are widely viewed as strong influences on stock
prices, making the balance of power in Washington just one of
many factors affecting investor sentiment. 
    Two Democratic presidents - Bill Clinton and Barack Obama -
have presided over the strongest S&P 500 performances
 since 1952, with gains of 208 percent and 166 percent,
    Wall Street has applauded Trump since he took power in
January 2017 and quickly pushed through measures to deregulate
banks and other companies. Last December, his Republican party
passed sweeping corporate tax cuts that have S&P 500 companies
on track this year to grow their earnings per share by over 20
percent, the biggest jump since 2010, according to Refinitiv
IBES data.
    "Volatility may rise regardless of the outcome, but, based
on historical relationships, equities may be more likely to rise
if Republicans manage to maintain control of Congress," Deutsche
Bank said in a recent report.

 (Reporting by Noel Randewich
Editing by James Dalgleish)
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