Republican victories are good for the stock market, right?
Shrewd investors know that’s a trick question. A look at the market’s performance after the 2010 midterms helps explain why. The S&P 500 stock index rose modestly the day after Republicans took control of the House on Nov. 2, 2010. By the end of the week, the market was up a healthy 3.5% over its pre-election close. Since Republicans tend to support pro-business policies, investors seemed to think a Republican-controlled House would stall new regulations such as the Dodd-Frank financial reforms and Obamacare and ease the burden on the corporate sector.
The market quickly changed its mind. By the end of November the S&P 500 index was 3.7% below its post-election high. It turned out that Republican-backed policies such as the spending cuts known as the sequester and a high-stakes standoff over the federal borrowing limit weren’t so friendly to stock prices after all. And Republicans were unable to stop tax increases that went into effect following the “fiscal cliff” drama at the end of 2012. The lesson for this year? Don’t expect much of a bump in stock prices even if there’s a Republican sweep—and if there is a post-election rally, don’t expect it to last.