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What gridlock in Washington really means for stocks

The government is divided – Democrats have control of the House and Republicans are keeping control of the Senate.

Is gridlock in Washington, D.C., good or bad for the stock market? The answer is complicated and depends whether you’re a short-term or long-term investor.

First, historical data suggests a unified government is better for the stock market.

During the third and fourth years of a presidential term — going back to 1935 — the S&P 500 (^GSPC) rose an average of roughly 18% annually when the government is controlled by Democrats or Republicans. That eclipses the 13% return under a divided government, according to analysis from BMO Capital Markets.

In today’s markets, however, some gridlock in Washington isn’t a bad thing for stocks, according to Kristina Hooper, chief global market strategist at Invesco.

“The market gave us a nice pop in 2017 and that was largely in anticipation of tax reform, but 2018 has been a different environment because tariffs have weighed on stocks,” she told Yahoo Finance. This year’s agenda, she said, has been “far less supportive of growth.” 

President Donald Trump’s hawkish trade policies could be toned down with Democrats in control of the House of Representatives, which would create a divided government, Hooper pointed out.

While the President has the power to impose tariffs, that privilege was initially given to Congress. Following the Smoot-Hawley tariffs of 1930, President Roosevelt convinced Congress to grant more tariff powers to the President, Hooper explained.

“There is the potential that you could see a Democratic House work with a Republican Senate to introduce legislation that claws back the president’s power over tariffs, since many Senate Republicans are in support of free-trade,” she said.

While Hooper acknowledges that such a legislation would likely be vetoed by the president, the notion of Congress taking a stronger stance on trade could “moderate the [Trump] administration’s trade policy.”

Worries about a trade war with China have kept a lid on the broader stock market so far in 2018, with the S&P 500 up only 3%.

Still, regardless of Washington uncertainty, Hooper suggests taking advantage of any upcoming volatility and notes that October’s stock sell-off has made valuations more attractive.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm. Follow Yahoo Finance on TwitterFacebookInstagramFlipboardLinkedIn, and reddit.

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