Trade the Congressional Effect: How To Profit from Congress's Impact on the Stock Market

Unified Government Favors Nominal Returns

What happens if we look instead of at the political parties whether or not government was free to function and free to do its will? We also looked at this period of time into whether government was unified or had gridlock, and we defined total gridlock as a split Congress and partial gridlock as one party controlling both houses of Congress and the other party controlling the White House. With total unity, the S&P average total return was 12.92 percent from 1960 to 2011 and the average price return in the DJIA was 6.97 percent. With a total gridlock, meaning a split Congress, the S&P total average return was 9.48 percent. The DJIA price return was 8.63 percent. With partial gridlock, meaning one party controlling both houses of Congress, the S&P total average return was 10.46 percent and the Dow had 7.13 percent price return.

What emerges from the nominal numbers is a reflection of the bull market of the 1990s, which was far and away the biggest bull market we've had in nominal terms and reflected a market where we had President Bill Clinton, the Democratic president, and for most of the 1990s a Republican Congress from 1994 to the end of 2000. What happens if we step back and try to look at these markets adjusting for inflation? Republican presidents have much lower total returns, 3.97 percent, while Democratic presidents have an average total return of 10.91 percent. Again, this is simply taking the consumer price index (CPI) price inflator ...