Is Congressional Gridlock Good For Your Nest Egg? What A Divided Government Means For Personal Finances

As the Republican party gains back control of the House, the U.S. Congress is stuck once again in gridlock mode.

With a Republican-controlled House, a Democratic president and a Senate divided in half with no defining supermajority, the Democratic and Republican parties have arrived at a new stalemate for the final two years of Joe Biden’s presidency.

Related Link: Larry Summers Considers Debt Limit 'Much More Serious Risk' Amid Rising Interest Rates, Divided Congress.

This effectively means that neither of the two major U.S. parties have enough power to enact legislation without going through slow and painful negotiations. 

But what does this mean for American households building up a nest egg of savings or investments for the future?

Gridlock Makes Lawmaking More Predictable, And Markets Like That

For those invested in the stock market, gridlock can be good news. Gridlocks might be frustrating and shed light on the flaws of American democracy. They can even lead to government shutdowns and make the passage of new legislation almost impossible to achieve.

But if there’s one thing they offer, it’s predictability.

If the legislative power is stuck on the ground, that results in less legislative action, which in turn means that no major bills can be approved. This helps companies, analysts and investors to eliminate some of the variables that make it difficult to predict how the markets are going to react in the near future.

Most of the variables that make predicting the market’s behavior are still in place, but removing the possibility of large changes to the tax code, for instance, can add certainty to market forecasts and give investors more maneuverability.

Other strong changes that become unlikely in a gridlocked Congress are the approval of large budgets for government spending or new laws that can have a strong effect on specific sectors, like tech, energy or transport.

Lessons From History

The equity markets tend to perform well after midterm elections, regardless of the results. As election results remove the uncertainty that exists before a vote, the equity markets tend to go up.

Since 1950, the S&P 500 has gone up every year following a midterm election, without exception.

Furthermore, the market gauge has historically outperformed on a yearly basis in the years following a midterm election where Republicans gained control of the Congress with a Democrat president in office. According to the New York Times, on average, the S&P 500 has risen 17.5% in those years against an overall average of 12.3% in yearly return.

Still, investors shouldn’t go so far as to take midterm elections for a crystal ball. While history shows that the markets have performed better after a gridlock, each market carries its own circumstances, and the current one is not without its risk.

Record-breaking inflation levels accompanied by rising interest rates stand as major hurdles for economic growth and are likely to continue to have a negative impact for American companies during 2023.

The ongoing armed conflict in Ukraine is also a major cause for concern, as the war in Europe has vastly affected an already disrupted global supply chain that had been presenting major performance issues since the COVID-19 pandemic.

Still, when it comes to gaining peace of mind, investors can take the midterm election results as good news for the overall performance of the equity markets.

Photo by Louis Velazquez on Unsplash. Edited by Benzinga.