It was exactly 20 years ago, in November 1994, that Republicans under the maverick leadership of Newt Gingrich and his Contract with America took over the House of Representatives for the first time in nearly half a century.
What may not be remembered is that the GOP sweep continued what became the longest and strongest stock market expansion in American history. Investors fell in love with the idea of a centrist Democrat, Bill Clinton, in the White House and a conservative Congress.
Both the bond and stock markets turned even more bullish. After gaining 80% the preceding six years, the Dow soared another 185% the next six years, from about 3,800 to near 11,000.
Could it happen again? Well, “Barack Obama is clearly no Bill Clinton,” says Arthur Laffer, chief architect of the Reagan economic agenda. “This president isn’t as likely to compromise and find center ground.”
But the history here is instructive. A Republican Congress has generally been good for financial markets.
The average annual rate of return in the post-World War II era on the S&P 500 has been over 14% when Republicans controlled both chambers, according to research by Sam Stovall, U.S. equity strategist for S&P Capital IQ. That is true whether there’s a Republican or Democrat in the White House.
Even with Republicans controlling just one chamber, the House, the stock market has done very well. In the last four years, the annual rate of return has been just over 13%, well over the 8.8% average, according to Stovall.
(For the record, the worst combination for the financial markets is a Republican president and a Democrat-controlled Congress. In those years, returns are historically less than 5%.)
The big burst in the stock market immediately after the 1994 election was due in part to the fact that few predicted the landslide gains by Republicans until nearly the eve of the vote. This year’s election was different because most political pros gave the GOP a strong likelihood of winning back the Senate.
Some of the upside effects of the GOP Congress, therefore, are already baked into the market cake. That might explain the big run-up in recent months.
The S&P 500 rose to a new closing high Wednesday, though the Nasdaq fell fractionally.
The real political wild cards for the economy and especially for investors are twofold.
First, can Republicans get their act together and pull off the low-hanging fruit by passing business-friendly initiatives? They include corporate tax reform with lower rates, the Keystone pipeline, EPA regulatory reforms, changes in the Dodd-Frank bill and ObamaCare fixes to make the health law less onerous on families and businesses. Will those bills land on President Obama’s desk?
Second, will Obama sign any of them into law? In 2011, after the last GOP midterm sweep, he engaged in two years of hand-to-hand political combat with Republicans. Already, the editors of the left-wing Nation magazine have said that “Obama should double down” on his “progressive” agenda. If that happens, the formula will be gridlock, and neither side would get anything done.
But we could do worse. For those who think Washington is the ultimate driver of the economy, consider that the stock market has done best in the last 50 years when Congress wasn’t in session at all—and couldn’t pass any new laws or edicts.
Don’t be surprised to see another dust-up on Obamacare. Conservatives are already demanding a vote in both chambers on full repeal. But it will meet with a veto.
“We can pass a lot of sensible reforms to Obamacare that will cover more people and make medical care more affordable,” says Paul Ryan, R-Wis. They would include repeal of the medical device tax, repeal of the so-called “employer mandate” and eliminating the 50-worker and 30-hour workweek rules that kick in the mandate.
One beneficial reform that Republicans could insist on is to rein in the Federal Reserve. This is a call for a little perestroika, or openness, at the Fed so investors don’t have to guess what Janet Yellen and her crew will do next.
While voters’ whims shouldn’t dictate monetary policy, it’s also true that to put so much unfettered power in the hands of an elite few, completely divorced from the electorate, can be dangerous. That’s how we got more than $3 trillion of quantitative easing.
Senate GOP leader Mitch McConnell often notes that an unheralded GOP policy victory occurred during negotiations with Obama in 2011. The resulting sequester and spending caps slammed the brakes on the Obama stampede of spending and debt.
Since John Boehner became Speaker of the House, the budget deficit has been cut by more than half and federal spending as a share of GDP has fallen from more than 23% to near 21% — a reverse Keynesian stimulus to the private economy. If the current caps stay in place, spending will fall to less than 19% of GDP by the end of the Obama presidency.
So control of Congress really does matter in terms of how workers and investors fare. If the GOP can next get tax rates down, push pro-growth energy policies and put a leash on Obama’s anti-business regulatory czars, it could be bullish for both stocks and wages.
Originally appeared on Investors.com.
