S&P 500: Largest gains takes place under split government – TDS

Strategists at TD Securities analyze the S&P 500 performance during prior elections. They concluded that the index performs better in the post-election year and also notes that the S&P 500 outperforms when there is a split government.

Key quotes

“The evidence on the historical market performance following a Republican or Democrat victory is mixed. On average, S&P 500 has tended to see stronger one-month post-election performance following a Republican presidential win rather than a Democrat win. However, this outperformance has tended to be short-lived as, within 12 months, equities have tended to outperform under Democrat victories.” 

“The S&P has generally tended to perform better in the year following an election relative to non-election years. This is the case for both presidential and midterm elections, with the outperformance being particularly strong following midterm elections.”

“Equities have tended to underperform in the years following sweeps – when the Democrats or Republicans won the Presidency as well as the House and Senate. In the year following a split government, equities outperform by nearly 5pp relative to elections that yielded sweeps. This makes sense since checks and balances in the form of a split government should lower legislative volatility. The outperformance is also consistent with why the S&P has historically enjoyed the largest gains after midterm elections, which often result in split government. In fact, some of the largest equity gains in recent memory took place under split Congress; the S&P rallied close to 30% in 1985, 2013, and 2019 — all on the heels of a split government.”