Yesterday, I reviewed the outstanding performance of the market three months after midterm elections. I also noted that the third years of the presidential cycle tend to be very bullish. The fourth year of presidential terms, along with first and second years, tend to be much less consistently bullish than third years.
Yesterday, I asked Joe, “How well does the S&P 500 perform from the midterm elections to the end of the third year of the President’s term?” The results are spectacular. Since 1962, there have been 12 such 14-month periods, and their average increase was 20.9%! Not one of them was down. Indeed, there are only two gains that are not in the double digits: 0.4% during 1986-1987 and 6.2% during 2006-2007. … I suppose it could be different this time. Gridlock might block appropriate policy responses to revive economic growth, if necessary. Gridlock might mean that the Bush tax cuts won’t be extended for another year to avoid depressing a depressing recovery. Gridlock could stymie any agreement on measures necessary to narrow the federal deficit. Then again, a sweeping ouster of incumbents on November 2 might be a good start toward bringing back some fiscal discipline in Washington by newly elected legislators, who really want to do what’s good for the country rather than for themselves.
Me: Gridlock is better than another wave of tax hikes and regulation — but not as good as spending cuts and pro-growth policies like cutting taxes on companies and capital.