The election and the stock market -- who wins?

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From Times staff writer Martin Zimmerman:

If history is any guide, the 2008 national elections won’t provide the kindling for a major stock market boom.

Since 1949 -- the first year of Democrat Harry S. Truman’s only elected term -- the best possible political alignment in Washington for investors has been a Democratic president and a Republican Congress.

During such eras (think Clinton-Gingrich), the Dow Jones industrial average has posted average annual gains of 19.5%, according to the Stock Trader’s Almanac, which tracks stock market trends and tendencies. That compares with an average annual gain of 8.7% for the entire 1949-2007 period.

In other words, Wall Street historically has liked that particular form of political gridlock, with ‘two competing parties pushing against each other,’ said Jeffrey A. Hirsch, the almanac’s chief editor. Gridlock can put the brakes on overly activist lawmaking, which generally suits Wall Street just fine.

The problem for investors is that the chances for such an outcome are remote this year. True, the White House clearly is up for grabs. And the Democrats’ slim majority in the Senate, resting as it does on the votes of two independents who “caucus” with the Democrats, isn’t exactly insurmountable.

But it would take a shocker of Dewey-defeats-Truman proportions for the Democrats to squander their 36-seat lead in the House. That also means that the political alignment with the second-best stock market record since ‘49 — a Republican president paired with GOP control of the House and Senate, which yielded a 14.1% average annual Dow gain — probably isn’t in the cards either.

So where does that leave us? Since 1949 there hasn’t been a scenario where a Democratic lived in the White House while control of Congress was split between the Democrats and the GOP, so there’s no track record to go by there.

The most likely outcomes of this year’s election have proved the least satisfying for the stock market in the modern era. During periods in which a GOP president ruled with either a Democrat-controlled or split Congress, the Dow notched average annual gains of 6.7%. And the set-up of a Democratic president and Democrat-controlled Congress fared the worst of the six possible combinations, although only slightly so, with a 6.6% average annual gain in the Dow.

In other words, from the market’s historical point of view, Decision ’08 is looking like a wash.