Opinion: What a divided government means to your portfolio

Republicans have gained the required seats to take the U.S. House of Representatives, ending the Democrat trifecta and setting the stage for a divided government for the next two years.

This scenario begs the question: Are Republicans or Democrats better for the stock market?

Historically, a divided government has been positive for both the economy and the stock market. Since World War II, the average annualized rate of return for the economy during a divided government has been 2.7%, coupled with a positive 7.9% annualized growth rate for the stock market, according to an analysis by J.P. Morgan Asset Management.

Prior to the George W. Bush administration, the last time the Republicans had a trifecta was in 1953, and the last time the Democrats had a trifecta was 1993. Using this history as our measure, the U.S. has seen dramatic swings in the balance of power since the start of the 21st century, according to House archives.

The trends
The Republicans held the majority for most of the first six years of President George W. Bush’s term in office. During that time, the S&P 500 returned an annualized 3.2%, or a cumulative 21% (including dividend reinvestments). During the last two years of the Bush administration, the Democrats controlled the House and the Senate, and the market dropped by an annualized 21.9%, or down 39% cumulatively over the two-year period.

During President Barack Obama’s first two years in office, the Democrats controlled the House and the Senate. The S&P 500 returned an annualized 22%, or 48.8% cumulatively over the time frame. During the last six years of his presidency, the U.S. had a divided government, and the market returned an annualized 12.7% during that period, or 104.8% cumulative over the six years.

The Republicans had a unified government in the first two years of Donald Trump’s presidency. During that time, the S&P 500 returned an annualized 12%, or 25.5% cumulative for the period. The following two years, the Democrats took the Senate, Republicans held the House, and the market returned an annualized 24%, or 53.8% cumulative during those two years.

In 2021, President Joe Biden was inaugurated along with a Democratic House and Senate. Through Oct. 31, 2022, the market has returned an annualized 3.2%, or 5.9% cumulatively, since January 2021.

However, if you would have invested $10,000 into an S&P 500 index fund at the beginning of the unified Republican government under the Bush administration and held it through the unified Democrat government of the Biden administration, your investment would have returned an average annual rate of 7.1%, or 343% cumulatively over the period, and it’d be worth $44,300 (as of Oct. 31, 2022). Always note, though, that past performance is no guarantee of future results.

Staying the course
During the time periods stated above, we’ve been through recessions, wars, a global financial crisis, the COVID-19 pandemic, supply chain disruptions, soaring inflation and other events of concern – all while the balance of power continually shifted.

The takeaway is to not let your political leanings drive your investment strategy. The cost to your portfolio could be significant. Out of the last 30 years, missing the best 10 days of the market would have cut your returns by 50%; missing the best 30 days would have cut your returns by 83%, according to research by Morningstar and Hartford Funds.

Markets can move rather swiftly. Staying the course could benefit you in the long run, provided that your asset allocation is aligned with your long-term goals.

Andy Drennen is a certified financial planner and senior portfolio manager at Simmons Private Wealth in Springfield. He can be reached at andy.drennen@simmonsbank.com.