With the whipsaw trading we’ve seen of late, it appears that the U.S. financial markets are already chewing through the post-election honeymoon.
I have to say that I, for one, am relieved that’s the case because it signals that the markets are already returning to normal.
I realize it may not feel that way, but there’s one very important thing to remember: We nearly always seem to receive the best news near, or at, market tops, and the worst news near, or at, market bottoms.
Although that seems contradictory, it actually makes sense. And investors can take some solace in the fact that the mounting tide of bad news is an important part of the bottoming process.
Speaking of which, studies show that the most dangerous time for American markets (and U.S.-centric investors) is when one political party controls all the marbles. It doesn’t matter which one, either — Republican or Democrat.
The reason is clear: Single-party control typically brings out the very worst in big government in the form of higher taxes, magnified spending and even war.
As my friend, economist Mark Skousen, recently noted, “Every one of the major wars involving America occurred during one-party rule: World War I, World War II, Korea, Vietnam and Iraq.”
According to studies conducted by researchers at Ned Davis Research, the best thing financially would be to have a divided government and gridlock. In short, the Dow Jones Industrial Average Index (DJI) logs its biggest net gains with a donkey in the White House and elephants traversing the halls of the U.S. Capitol.
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During such periods — with a Democrat in the White House and a Republican Congress — the stock market generates an average return of 9.6% a year.
People assume that a presidential administration and Congress with matching political affiliations is the best way to get things done but, in reality, the checks and balances of a mismatched pair helps to ensure that governmental agendas don’t go to extremes.
Thus, somewhat surprisingly, political gridlock is actually a reality that puts investors at ease and permits the financial markets to operate efficiently.
Obviously, with Democratic President-elect Barack Obama coming into office in the New Year, along with an even stronger Democratic Congress, we’re not going to have such gridlock-generated returns to look forward to.
But fret not: Another interesting conclusion suggested by our own research, and that of Ned Davis and other research firms, is actually quite promising. In stark contrast to what most investors believe to be true — that Republicans are better for the markets — the fact is that the blue-chip-dominated Dow tends to rise nearly twice as fast during Democratic presidencies (7.2%) as it does during Republican ones (3.8%).
The great equalizer, if there is one, appears to be inflation, which rapidly eats away the higher returns to bring them within a few basis points of each other over time.
And with the U.S. government having injected roughly $3 trillion in bailout money into the financial markets, an inflationary environment may well be in our future.
Keith Fitz-Gerald is the Investment Director for Money Morning/The Money Map Report. For more information on Keith, read his bio here.
