Tuesday, August 24, 2010

Why Gridlock is Good for Investors

"Since 1973, using the price of gold as a deflator (instead of the Consumer Price Index, which has suffered from style drift over the years) real, inflation-adjusted returns for the S&P 500 were a fabulous 15.3 percent gain in “gridlock” years, and a horrible 9.9 percent loss in years with unified government (see chart above). That’s a 25 percentage point difference.

The reason for this difference is simple: Unified governments spend far more, and more quickly, and expand regulation much more than split governments do. Programs sail through, the dollar is jeopardized, and investors seek real assets like gold to counteract the political risks of an activist government.

Based on the data, the ill effects of unified government apply to both Republican (a 7.7 percent loss) and Democrat (a loss of 11.5 percent) unified governments. The best was a split between a Republican Congress and Democratic President Clinton, which produced a whopping 32.8 percent real return.

President Reagan and a split Congress did pretty well too, with a 24.8 percent real return. Both President Reagan and Clinton did their best sustained work with a constraining Congress, or, to be more accurate, those Congresses did their best work with popular Presidents.

When it comes to split government and real returns, the right answer is “divided we stand, united we fall.”

~ Eric Singer, one of the managers of the Congressional Effect Fund, the first mutual fund to explicitly seek to minimize investor exposure to potentially negative impact of new and proposed Congressional legislation on the broad stock market.

Grouch: I've always joked the country would be better off if Congress adjourned indefinitely and most of the administration went on an extended vacation.  Ok, it really wasn't that much of a joke, more like a fantasy imagining the returns churned out by and an unfettered US economy and US entrepreneurs.  I think the current unified government more than proves Singer's point that they "spend far more, and more quickly, and expand regulation."

HT: Carpe Diem


  1. Interesting stat. I gues we should hope that the Republicans take the house and/or senate to help our equity returns.

  2. Personally, I hope Congress (whichever party is in charge) will take the next two years off so the economy can naturally recover from the downturn and the very expensive "stimulus" programs.

  3. The sad thing is, in my opinion, that we don't have more Congressmen of principle. I think we now need more stimulus or at least to spend the stimulus funds that have been approved. Congress has backed the country into a corner. The problem is that we came into the downturn, after a really strong economic period, with a $600 billion deficit. If we had entered the recession with a small debt then we could have had the stimulus and it wouldn't have put us on the brink of bankruptcy. In fact, during the good times we could have done a lot to shore up Social Security and Medicare.

  4. The classic Keynsian thinking as I understand it is to run a surplus during good economic times so that during difficult times you can run a deficit and engage in stimulus spending to help hasten the economic recovery. Somehow we've forgotten the part about running a surplus during good times; we seem to be in stimulus spending mode all the time.

    I agree with your comment about lacking Congressmen of principle. At some point in the near future we are going to have to elect a Congress and a President who are going to have no choice but to cut spending and entitlements. We certainly haven't had anything remotely resembling that over the past 10 years. Our politicians can't keep playing Santa Claus with other people's money forever.

  5. The Grouch,

    (Forgive me. I looked for an email address so I could send this to you privately but couldn't find one.)

    One of my blogger friends sent me a link to this post. I linked to it from AllFinancialMatters.com. I wanted to tell you that this post was timely to me personally because I just put together a PDF history of the presidents and a few key economic stats (Receipts, Outlays, Surplus/Deficit, Year-end Debt, GDP, and the Total Return on the S&P 500 Index). I'd like to invite you to take a look at it. Visit AllFinancialMatters.com and search for "Presidents and Economics (Roosevelt - Bush)."

  6. Personally, I don't think any of these stats mean much of anything. But it is interesting that someone would start a mutual fund based on the premise that divided government = great stock market returns. I think that worked for Regan and Clinton, but no guarantee it will work in the future.