Republicans have seized control of the House and increased their presence in the Senate. How will this shift in power affect investors? We can only speculate. Thankfully, we aren't completely in the dark when speculating, as history provides some clues.
While we cannot possibly discuss the potential impact on every type of investment in this brief blog, let's focus on two: stocks and bonds.
It is commonly held that Republicans are "business-friendly", and thus good for the stock market when they are the controlling party, but there is no solid data to back this up. Additionally, stock returns in years when power is split between the White House and Congress show no clear pattern. Some historical averages however, are interesting to note. Since 1945, the Standard and Poor's 500 index has gained 4 percent in years when Congress was split between parties, 8 percent when Congress was controlled by one party but the White House another, and 11 percent when a single party was in control of Washington. Also noteworthy, though, is an observation made by the Wall Street Journal while commenting on the future of the stock market in light of recent election results: "Watch out for anyone who tells you 'divided government is good for the stock market.' The historical basis for this — such as data since 1949 via the Stock Trader's Almanac — is meager. You can't extrapolate universal rules from such a small amount of data."
Two months ago, the GOP issued their 48-page Pledge to America. In it, they laid a plan for trillions in tax cuts, but few intentions
to cut spending. Where bonds are concerned, if taxes are cut and deficits rise, the government will likely issue more bonds. The result could be a depression in prices and an undermining of confidence in federal finances. While this scenario wouldn't be so bad if bonds were already cheap, it is a concern when bond prices are inflated, as they are right now.
One thing is certain: 2011 will be an interesting year. The president's party no longer has control of Congress. It will be the second year of a slow economic recovery, and one year before the next presidential election. With so many economic and policy issues remaining uncertain, the way politicians handle their responsibilities will be closely scrutinized.