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Divided we make money: Why the stock market wants a Republican victory

Historical analysis shows that the stock market does best under a divided government – especially with a Democratic president in the White House and a Republican-controlled Congress. Big GOP gains this midterm election could mean big gains for Wall Street, too.

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For voters distraught about the prospects of a Democratic bloodbath in the midterm elections and the potential loss of control of Congress, consider this: a changeover may be great news for the stock market.

Election coverage: News and analysis for the 2010 midterm elections

Conventional wisdom suggests Wall Street may be most receptive – and responsive – to Republican control of government and the pro-corporate policies typically supported by the GOP. But the evidence suggests that the stock market actually fares best under a divided government, when the party that controls the White House differs from the majority party in Congress. In fact, the winning combination for Wall Street seems to be a Democratic president with a counterbalance of a GOP-led Congress.

Stocks grow under divided government

Recent studies suggest some aspects of the economy generally perform better under Democratic presidents than Republicans. This appears to be specifically true of the stock market. Between 1975 and 2009, the Dow Jones Industrial Average climbed 11.6 percent annually on average during Democratic administrations, compared to 8.5 percent during Republican presidencies.

But here’s where the real difference shows up.

Stock market performance over the same period has been markedly better under divided control of government – when one party has controlled the White House but not both chambers of Congress – than when the party in the White House also has a majority in Congress. The Dow rose by 6.1 percent annually on average during periods of unified government, but climbed at more than twice this pace (by 11.1 percent annually on average) during episodes of divided control.

The Dow does also seem to fare slightly better under Republican control of the US House, growing by an average 11.1 percent annually between 1975 and 2009, compared to 9.0 percent when Democrats control the House. But, still, no political power arrangement correlates better with strong stock market performance than a government divided between two parties.

More on the economy: Check out these 1 Minute debates on tax cuts and job creation.

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