A GOP Landslide Could Help the Stock Market

In tomorrow's midterm election, Republicans are almost sure to take over the House of Representatives and pick up a handful of seats in the Senate. The result will be stalemate. Democrats won't have the votes to pass the White House's agenda, and Republicans won't have the pen to sign GOP legislation. One possible result: a Do-Nothing Congress.

But is that a bad thing?

It is a bad thing, if you want Congress to do something big -- like repeal the health care law, or pass cap-and-trade. It is not a bad thing if you want Congress to do very little at all. And there is a popular perception that government inaction is like MiracleGro to stocks. Into the vacuum of government activity, businesses expand.

And so, Annie Lowrey writes, maybe we should expect a stock burst in the months after the midterms:

One thing is certain: Markets love midterm elections. Brian Gendreau, a market strategist for Financial Network, found that the Dow has risen after 19 of the 22 most recent midterms. From 1922 to 2006, the Dow jumped 8.5 percent in the 90 trading days following the midterms, versus just 3.6 percent in non-midterm-election years.

Gendreau has two theories for the findings. The first is the oft-repeated gridlock theory: Midterms generally result in a more even distribution of power in government, and markets generally smile on the diminished possibility of legislative meddling. A second, related theory relates to uncertainty. Before midterms, markets are unsure of what priorities Congress will have. After midterms, they have more certainty--so investors worry less and stocks rally.

Read the full story at Slate. But also keep in mind that the 111th Congress was historically hyperactive, passing a stimulus, health care reform, financial reform, and even cap and trade (in the House). How did stocks fair in the hyperactivity? In March 2009, the stock market was spilling into the 6000s. In October 2010, it's kissing 11,000. If political gridlock might be healthy for stocks, today's incumbents weren't exactly a plague.