Average Stock Market Returns When There’s Political Gridlock (Massive)

Despite the differences in political philosophies, the one thing both Republicans and Democrats can agree on is economic prosperity. Everybody wants to gain more wealth. Therefore, for stock market investors, having political gridlock tends to be wonderful for returns.

No party can always get what it wants. And when one party does get what it wants, it is always a watered-down version due to the need for compromise.

Historically, stock market returns have been especially good when a Democrat is in the White House and Republicans control at least one chamber of Congress. With Joe Biden as President, this is likely exactly what we're going to get.

However, after the Georgia Senate election, there is no gridlock in Congress as Democrats have control of both chambers of Congress.

Either way, let's check out the data and see what the historical average stock market returns are when there's political gridlock.

Political Gridlock And Average Stock Market Returns

In scenarios where a Democrat is in the White House and Republicans control at least one chamber of Congress, the average return for the S&P 500 has been a whopping 33.9% during these periods since 1989!

I couldn't believe the average stock market return myself until I studied the chart created by Jefferies, a boutique investment bank.

Here's a fun random insight. Many of my old colleagues from bulge bracket firms would jump ship to Jefferies because they often paid huge two-year guarantees. This is something I should have done before leaving finance. Oh well.

Focus on the rows in blue below. The blue rows show when there's a Democratic president and there's Congressional gridlock.

Average Stock Market Returns When There's Political Gridlock Is Massive

Not only is the average stock market return 33.9% when there's Congressional gridlock and a Democrat as president, but there has also never been a down year in the S&P 500 during this scenario since 1989!

Further, what a stark performance difference in returns when there is political gridlock when a Republican is president at -2.8% on average. That's a 36.7% spread.

Finally, global equities is a huge underperformer when there is gridlock under both political gridlock scenarios.

When a Democrat is president during gridlock, global equities underperform U.S. equities by 17.4 percentage points (16.5% vs 33.9%). When a Republican is president during gridlock, global equities underperform U.S. equities by 10.1 percentage points (-12.9% vs. -2.8%).

Whether this is simply due to correlation and luck, it's hard to say. It may be too arrogant to believe that because of political gridlock, America is too busy fighting domestic battles rather than building international alliances. At least under a Democratic president gridlock scenario, both global and U.S. equities have shown a positive returns.

Note: There are a couple small errors in the Jefferies chart. Trump had a Democrat House, not Senate. The Jan 20 1989 session had gridlock but is not shaded as being counted as a gridlock period with Republican President. If Jefferies took that 16% outperformance into the Republican gridlock average and out of the non-gridlock average it would lower the 33.9% average return. However, the average stock market return when there's Congressional gridlock is still very high when a Democrat is in the White House.

Political Gridlock Should Make Investors Bullish

Whatever your party affiliation, political gridlock should make you want to buy more equities. It is unlikely that anything meaningful will get done to spook investors over the next four years. However, Democrats will try their hardest to take the Senate in 2022 and push their desired legislation over Biden's or Harris' last two years.

Some things bullish investors should keep an eye on are 401(k) contribution limits, 401(k) deduction limits, corporate tax rates, income tax rates, gift tax limits, Net Interest Income Tax, long-term capital gains tax rate, and estate tax exemption thresholds among others. Any big changes to these policies may have a negative effect on stock market returns.

Thankfully, we understand that all politicians crave power. Therefore, if the stock market is collapsing due to potential policy changes, our politicians will likely push through less onerous changes.

On the flip side, post-election results, there is still plenty of positive momentum for the stock market.

More Reasons To Be Bullish On Stocks

  • Some investors have been selling or shorting in anticipation of a big blue wave that did not materialize. Therefore, higher capital gains tax rates and other higher tax rates are unlikely to happen.
  • 3Q2020 earnings season is over and the overall numbers were better-than-expected. Companies won't be reporting again until 2021.
  • The Fed mentioned in its latest meeting that it will remain accommodative and use all its means to help keep the economy going. The Fed is not worried about inflation or overshooting inflation, which means the Fed Funds rate will likely stay at 0% – 0.25% for another year.
  • At this point, any additional stimulus before year-end 2020 will feel like a big bonus since it's been over three months since the previous stimulus package expired.
  • The unemployment rate has trended back down to a no longer shocking 6.9%.
  • After counting all the votes in all the highly contested states, Trump will likely concede by year-end due to Biden's insurmountable lead.
  • A bevy of positive vaccine news should come by year-end, giving a renewed hope for a sustained recovery in 2021+. Pay attention to news from Pfizer and Moderna in particular.

Positive Returns For 2021+

Although we're sitting near all-time highs in the S&P 500, I think the chances the S&P 500 will end both 2020 and 2021 above 3,500 are very high.

Specifically, I would assign a 75% probability long investors make money in the S&P 500 post election over the next 14 months. For now, I'll also set a price target of 3,888 for an 10.8% return by end of 2021. 3,888 is based on 23.5X forward earnings. I'm much more conservative compared to investment banks such as Goldman Sachs (4,300 year-end 2021 target) and JP Morgan (4,500 year-end 2021 target).

Goldman Sachs S&P 500 target price for 2020, 2021, and 2022

Given my positive view, I will continue to max out my Solo 401(k) and SEP IRA and contribute the maximum gift tax amount to each of my children's 529 plans. My net worth allocation to stocks will remain at my comfortable maximum of 25% as well.

On the real estate front, I believe there is going to be a rebound in big city living again. You've got the combination of a potential vaccine, lower coronavirus positivity rates, lower rents in some areas, booming tech companies, and more aligned political philosophies with the White House bringing capital and residents back.

Therefore, I will be buying more rental properties to take advantage of a rebound in rents and prices. I'm so excited for the opportunity to build more passive income!

Don't Depend On Government

As financial independence seekers, we should never rely on the government to save us. Political gridlock helps ensure that we can continue to independently plan our financial future without many dramatic surprises.

Yes, having your man or woman in office does feel more reassuring that everything will be OK. However, please focus on what you can control. Don't give in to the temptation to rely on the government for anything. Political promises are often broken.

We've got a lot of work to do to get ourselves out of this pandemic mess. However, I'm very hopeful that investors will come out wealthier once this pandemic is over. My plan is to re-retire by 2022 after another year of solid investment gains.

Invest In Real Estate As Well

In addition to investing in stocks, I'm also bullish on real estate. In fact, I'm more bullish on real estate given the value of rental income has gone way up since interest rates have come way down. It takes a lot more capital to generate the same amount of risk-adjusted income. Stocks are already very expensive. Therefore, my focus is on buying income-producing real estate properties.

My favorite two platforms are:

Fundrise: A way for all investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and invests in residential and industrial real estate predominantly in the Sunbelt region. Fundrise manages over $3.3 billion and has over 400,000 investors.

CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields. They also have potentially higher growth due to job growth and demographic trends.

I've personally invested $954,000 in real estate crowdfunding since 2016 to diversify my investments. It's nice to earn income 100% passively as I spend more time taking care of my children. 

Invest In Private Growth Companies

In addition, consider investing in private growth companies through an open venture capital fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.

30 thoughts on “Average Stock Market Returns When There’s Political Gridlock (Massive)”

  1. That Jeffries chart has 2 mistakes. One was already pointed out by someone that Trump had Democrat House, not Senate. The other is the Jan 20 1989 session had gridlock but is not shaded as being counted as a gridlock period with Republican President. If they took that 16% outperformance into the Republican gridlock average and out of the non-gridlock average it would certainly deflate point to some extent.

  2. I am definitely bullish in the long run, but don’t know how the assess the situation with all of the stimulus being pushed into the economy. A part of me believes that the stock market will always go up in the long run so I should invest as early as possible. But another part of me is stopping me from fully entering the market because I feel like something must give with all of the stimulus due to COVID-19 and that a large part of the bull run since March has been “artificial” (a result of the government.) Should I enter the market now? Should I stock up on gold and bitcoin? So many options, and so much doubt as to what to do.

    1. Wouldn’t excess stimulus and money printing prop up real assets in the long run? Dollar may lose value and ultimately hard assets should gain value based on inflation.

      1. Hmm that’s true. So would it be wise to buy assets such as gold and real estate in the environment now? (or invest in gold / real estate etfs)

  3. Interesting article and stats, thanks for sharing! I try to buy companies that perform well in any environment, but these insights do make a bullish case for the S&P 500.

    I am amazed by the average return, but not surprised. For 2021, I’m not really sure what to expect. I do think a lot of businesses changed forever, so I still want to see what happens with REITS, small businesses, and trends in residential real estate. Regardless, I will just keep dollar cost averaging into the market.

    Great post, Sam.

  4. This seems a little bit of a dubious conclusion. In the chart there are only 2 periods out of the 16 listed that US equities had a negative return. One was the dot com bubble burst and the other was the great recession. George W. Bush happened to be president both times and both periods were congressional gridlock as well (but with a republican president). I doubt anything George W. Bush did caused either one of these. He was probably just unlucky to be the President during these times. If anything, the chart just shows that the stock market tends to be positive over almost any reasonably long enough time frame.

  5. Great article and interesting stats. But I see a mistake in the table. Since late 2018 / early 2019, the Senate has been in Republican control, and the House has been in Democrat control. The table has it the other way around.

    1. Good catch. It still means Congressional gridlock, so the thesis of solid stock market returns when there is a Democrat in the White House and Congressional gridlock still stands.

  6. Money Ronin

    This seems like great news for investors. My wealth in almost equally divided between real estate and stocks and very little in bonds. I like to maintain that 50/50 balance, but lately I’ve become wary of CA real estate. Real estate has always be a higher return/higher effort investment for me, but I see risks going up without commensurate returns.

    At least in California, I expect continued legislative efforts to erode landlord rights to make it more operationally challenging. I don’t anticipate multi-family rents increasing at the same pace as years past. Covid has taught many people and companies that one can work remotely and not pay the sky high rents charged in large cities.

    In the 6 months since Covid happened.
    1. My kid’s therapist went to a 100% online model and moved his high rent practice to Portland (while charging CA prices).
    2. My kid’s chess coach was already 100% online. He moved to North Carolina (while charging CA prices).
    3. My brother who seemed content being a lifelong high-priced downtown renter (he acts like a Millennial) decided to buy a house because he finally realized the value of physical distancing.

    These are three high income people who decided to permanently stop paying high CA rents.

    Factors that affect single family home pricing is very different from factors that affect multi-family. Large vibrant cities are not dead, but those newly built Class A apartments are going to need to rev8se their pro-formas downward. As for my Class C properties, I am hoping for stable rents and continued low vacancies, but I’m not projecting rent increases. Neutral NOI = Neutral price appreciation.

  7. I’m cautiously optimistic about the market, although valuations are high and interest rates are low. Trump has not conceded and whether he ultimately wins re-election or not, they have certainly uncovered many irregularities in our voting system to the point that approximately 71 million people will have doubts about the ability to have free and fair elections. That point, along with the resumption of Critical Race Theory (which Asians may be lumped in with white Americans by virtue of their “privilege) foretells dark days for America. The Democrats plan is to divide America and to cater to a large swath of low information voters. Thankfully, DJT is increasing his share of Black and Latino Americans and even college voters as we know now that higher education is not really educating our children but brainwashing and indoctrinating them and turning them into hateful, jealous, political tyrants. Sad days ahead if we continue down this path.

    1. Biden will have a long road ahead trying to reverse the damage Trump did, indeed. College education gives us critical thinking skills, which help figure out for ourselves what are false claims and which have evidence behind them. All tools we need in this age of misinformation.

      Eventually though, Trump will be forgotten.

      1. What are those critical thinking skills telling you about Biden getting 80m votes to Obama’s 68m when he underperformed Obama everywhere but 5 battleground cities and spent the majority of his campaign in his basement?

    2. “certainly uncovered many irregularities” You mean “made up many fake voter fraud claims that don’t exist in reality.”

      Fixed it for ya.

      Voter fraud is pretty rare in reality. But far more than 71 million Americans don’t live in reality. The one book that sums all of this and so much more up is Fantasyland by Kurt Anderson. Worth a read.

  8. Frugal Bazooka

    I hope you’re right, but 2020 has changed the rules about everything and therefore I’m afraid the stock market 2020-2025 will not abide by the statistics from the past.
    The notion of hoping fiscal conservatives and “gridlock” will save us from sluggish economic policies is mildly dystopian as a financial strategy.
    For one second let’s imagine a scenario where the senate goes blue and they quickly increase income taxes on individuals and corporations, dramatically install “green” regulations and policies unfriendly to capital, free markets and profit.
    I hope I’m wrong, but I don’t feel like the market needs much of a push to go full bore, long term stampede should that happen.
    Let’s hope I’m 100% wrong (nothing would make me happier), but it appears 2020 will go down in history as one of the shit shows to end all shit shows and nothing is out of the realm of possibilities.

  9. Trey Reynolds

    I am 25 and I have a 85% allocation in the stock market with the rest in my checking account.
    Should I just keep shoveling money from the checking account into the stock market?

    1. My advice would be to keep 6 months of expenses in an FDIC-insured bank savings account, to protect yourself against a potential loss of income. (Or maybe you can go with a bit less than 6 months of expenses if you are unmarried and without children, and if you have extended family to help you in case of a job loss.) Also keep savings for any major purchase that you anticipate in the next couple of years, like a house or a car.

      Beyond that, contribute to retirement accounts such as a 401(k) or Roth IRA, and if possible put some additional money into a taxable brokerage account. In the retirement accounts, invest at least 80% in a mix of broadly diversified stock mutual funds (some large-cap and some small-cap, some growth and some value, some US and some international). And don’t get spooked when the market goes down — that’s your opportunity to buy at bargain prices! You have many decades for the market to go up again. (In the taxable brokerage account, you may want to invest more conservatively, depending on how soon you expect to take out money.)

    1. Then back to communism like Under Obama. Private property is outlawed again and it all belongs to the state.

    2. Paper Tiger

      There is a risk but it is fairly low. They would have to lose both seats in GA to lose control of the Senate and in that state, that is highly unlikely. Even if they did lose both, Joe Manchin in WV, a democrat in an overwhelmingly Republican state has publicly come out and said he would vote with the Republicans on the most controversial aspects of the liberal agenda that we should be concerned about, in effect, keeping a voting majority Republican. He knows this is the only way he can remain a duly elected senator in WV and still be a democrat.

  10. Wow I’m impressed with those stats! I wouldn’t have guessed they were so high. That gives me hope that next year could turn out ok.

    There’s still a lot unknown with covid of course but I’m glad to hear that Pfizer reported good results of the vaccine progress. So there is hope!

    It wouldn’t surprise me if there will be a lot of tax rule changes again in the coming months, but time will tell.

    Thanks for the informative post Sam!

  11. I’m always bullish on stocks, “even when they go down “ but I had no idea the returns where as high as the study pointed out. I’m a diehard Republican but even I can admit Trump lost because of his handling of the coronavirus. Biden”s briefing on the virus this morning was somewhat comforting. The fact that even a diehard Republican can be comforted by anything Biden says is my little anecdote to be bullish on the market. Plus, don’t fight the fed! They have more money than all of us.

    1. Yes, it seems like as soon as many people in the White House started getting the virus, the credibility to manage the virus was lost. If you can’t take care of your own people, how can the public expect to feel comforted.

      1. Five years from now Trump and the virus will be a faded memory. Time moves on. Wars and recession become memories.
        I have made good money since Dec. 2018. Between 2018 and now much has happened. Over the next four years much will happen. But nothing has changed. Growth companies continue to grow. Revenue, earnings and margins expand. No one has anything of value to tell me. I look at a company’s numbers. That is all I need to know. Let me ask you a question. Regardless of what happens, do you believe Amazon will not cost more five years from now? I believe it will cost more. I own it and I will own it for the next five years. In the mean time I don’t listen to what Bob, Mary, John or some self proclaimed analyst says.
        I decided I am an analyst. No one can say I’m not.
        If I can’t get a “real” job, calling myself an analyst is a good “gig.”

        1. Bob Bunting

          I would bet you are wrong on this Charles…in 5 years Trump will be President again and the climate will be warmer.

      2. Great question for Newsome and his aunt. I wonder what they were thinking at the salon and large dinner party? Good for me, but not for thee?

        Project warp speed

    2. Paper Tiger

      I think Trump’s purported poor handling of COVID is largely media-induced and I say that simply by the numbers, worldometers.info/coronavirus/

      In the US, we’ve tested more than any other country, along with China, at 160M tests but as a percentage of the population, we have tested much more than China. Of the 6.85M cases in the US that have closed, 6.6M of those have recovered or 96%. Out of 3.7M cases that are currently active, only 19K are categorized in the serious or critical category or .005%!

      While I would never say COVID is not a serious threat that we don’t need to address, the statistics show it is also not of the magnitude that we have been led to believe for reasons that have nothing to do with the health and well-being of our nation. Trump is criticized for not shutting the country down again but would that really make sense when only .005% of the people currently getting COVID in the US are the ones getting critically sick?

      In short, we’ve been duped by the media and those looking for a political change into believing in a crisis that was not of the magnitude it was conveyed to be.

      1. I agree with everything you said. What I have a problem with was the politicization regarding mask wearing. I truly believe if Trump made it cool to wear a mask and lead by example he would’ve won re-election. When our town enacted a mask mandate cases dropped by 80 percent. I dislike wearing a mask but I do it to protect the people around me. As Americans, Republicans and Democrats this shouldn’t have been a divisive issue.

      2. Had Trump focused on the exponential increase in European cases to illustrate that what he had done or not done really made little difference, I believe many would have realized that his approach was not any worse. Many used Germany as a shining example of how the pandemic should have been tackled and Germany is now facing the highest number of new cases they have ever had.

        Unless the US locks down and follows the Chinese model to the tee, the end result is always going to be a new wave until the majority of Americans have become infected and this assumes one cannot get reinfected. China locked down hard for less than 3 months and has reduced cases to essentially zero but one would have to accept that nearly no one would be permitted to leave their home, not even to go to the grocery store. And once lifted, everyone would have to accept a tracking app on their phone. This would require a leader that the US does not and Biden is certainly not that person.

  12. This is a good study. 34% is huge. It’s timely too. The stock market soared today due to PFE’s announcement. I’m very hopeful that life will get back to normal soon. Value stocks made huge gains today. S&P500 is already over 3,600. I love it!

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