Could DC’s New Political Alignment Be a Fiscal Goldilocks Scenario?
By: Jeffrey A. Hirsch
January 07, 2021
[2021 Stock Trader’s Almanac shipping update: Following production delays at our publisher, John Wiley & Sons, the 2021 Almanac was shipped to all existing members on December 28 via USPS. The USPS is also experiencing some delays, but your 2021 Almanac should be arriving soon in your mailbox, if it has not already. New Members that joined since December 30, we are shipping your 2021 Almanac as quickly as possible based upon the date you signed up.]
Now that the Georgia Senate seats runoff is settled and Joe Biden’s presidential election win has been certified we have more clarity on the political alignment for the next two years. We can extrapolate expected market performance based historical market performance under various political alignments and scenarios.
The two newly elected Democratic Senators from Georgia have tipped the balance of power in the Senate toward the Dems to an effective 50/50 split with the two Independents that caucus with the Dems. Democrats will gain control of the Senate with Kamala Harris’ tie-breaking vote once she is sworn in as vice president. Though the Democratic majority in the House of Representatives was diminished in the November elections they still maintain control. 
So the Dems control the White House and have virtual control of Congress, albeit by the thinnest of margins. The Senate majority is so thin you could consider this a split Congress. The thinking here is that this slim Democratic majority is likely sufficient to pass additional stimulus packages and perhaps even some real infrastructure legislation that has eluded Washington for decades. Yet, it’s not wide enough to push through any major tax increases or a Green New Deal.
In our Political Alignment Market Performance chart below you can see that the market has done best under a Democratic President with a Republican Congress gaining an average of 16.4% since 1949 and less than half as well with a Democratic Congress averaging 7.4% a year. However with a split Congress and a Democratic President, DJIA has returned an impressive 11.7%, though this is an extremely small dataset of four instances all under Obama from 2011-2014.
[Alignment Chart]
The other political cycle wrinkle to note is that we have change in party with a new, first year Democratic President. There are limited data points here as well with four. But they all came with democratic control of Congress and significantly higher performance for the S&P 500, averaging 10.6% with a median gain of 15.1% versus 7.0% for the average post-election year since 1949. The only loss came during Jimmy Carter’s first year that was saddled with the rampant stagflation of the late 1970s. 
[New Dem Table]
We have concerns about the slow vaccine rollout, high unemployment and new jobless claims, and the lagging service/restaurant sector and travel/leisure industry. As detailed on page 32 of the new 2021 Almanac, there is also the Post-Election Year syndrome, where we have historically paid the piper with a long history of bear markets, wars and foreign fiascos plaguing the Post-Election Year. But we are encouraged by the low rate environment, more fiscal stimulus and tame inflation. We suspect pent up demand to be unleashed later this year that should alleviate any market or economic setbacks we may experience in 2021.