History shows Democratic sweep better for stocks

By Kristina Cooke - Analysis

NEW YORK (Reuters) - U.S. investors are worried about a combination of a Barack Obama administration and a Democrat-controlled Congress. But history shows that of the two likely election outcomes, that scenario is better for stocks.

Their tax rates may go up after a Democratic sweep, but experience shows their stock portfolios could give them more of a cushion than under the alternative: Republican John McCain in the White House with Democrats running Capitol Hill.

The Democrats look set to maintain control of Congress in the November 4 election and may well expand their grip on the legislative branch. Meanwhile, the latest Reuters/C-Span/Zogby poll shows Obama with a 7-point lead over Republican McCain.

"From what I've heard, people on the Street are pretty concerned about an Obama victory because of their own taxes as well as the broader market," said Johnny Madrid, a trader at a major New York firm, who spoke on condition that his company not be named.

In the seven periods when Democrats had complete control of U.S. political power, the S&P 500 rose 14.7 percent on average while in the eight times a Republican was president and Democrats controlled Congress, the benchmark index rose 7.4 percent, according to data compiled by research firm Bespoke Investment Group, in Harrison, N.Y.

That goes against conventional wisdom that so-called "gridlock" is best for markets, a situation in which neither party can make sweeping policy changes that can upset markets.

That said, Bespoke's founders Justin Walters and Paul Hickey added that a Republican Congress and Democratic president -- highly unlikely this year -- would be the best- case scenario for stocks.

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Of course, history is not always the best guide for future performance, and many financial professionals are skeptical.

"You'd have an uncontested majority. You could see incredible structural changes and free markets do not respond well to that," said Tom Alexander, head of Alexander Trading, in Savannah, Georgia. "And Obama is a much more fiscally liberal individual."

Obama has said he would roll back some of Bush's tax cuts for the wealthy in the longer term.

But managing the faltering U.S. economy will be the most pressing issue for the next president, analysts said, and given the backdrop of a record budget deficit, it is likely both candidates will have to postpone some of their policy proposals.

Kevin Caron, market strategist at Stifel, Nicolaus & Co in Florham Park, New Jersey, noted that both candidates voted in favor of the $700 billion financial sector bailout.

"You did not have one or the other break ranks and decide they wanted to do something radically different. We have already set a path for greater government intervention and it will continue in both Obama and McCain administrations," he said.

And this year, whoever is elected will be confronted with the realities of recession, and will likely be boxed in on taxes and spending, Caron added.