Investment markets look down ballot

Of course, the presidential election matters to the investment markets. But the real, lasting power to influence business and the economy sits on Capitol Hill.

Congress holds the purse strings of taxes and spending. Legislative regulations have a force executive orders only hope to hold. A president may have a bully pulpit, but it is Congress that has to answer to voters more frequently.

As Americans await election results, investors will focus on control of Congress in the week ahead. More than a half-century of market research shows the S&P 500 stock index thrives the most when Congress is split — Democrats control one chamber while Republicans control the other. Divided power provides dividends for shareholders in the form of checks and balances on partisan policies.

Presidents make promises. Congress shapes policies. And markets reward certainty.

The House of Representatives is expected to remain a Democratic majority. Control of the Senate is less certain with several Senate races a toss-up. The new Congress will decide any new pandemic stimulus spending, and how to pay for it.

A politically divided government historically has been rewarding to shareholders and the economy. The political compromise necessary for policy-making provides less volatility. Some may call it gridlock. Others view it as deliberation.

What investment markets and the economy won’t like is a long delay. It took five weeks after voting before the 2000 presidential race was decided. The S&P 500 fell about 10%. And that was after a 4% drop in the week leading up to Election Day.

Elections make investors nervous. Clear yet divided results are comforting.

Tom Hudson hosts “The Sunshine Economy” on WLRN-FM, where he is the vice president of news. Twitter: @HudsonsView

This story was originally published October 30, 2020 at 6:00 AM.