Elections may decide stock trends

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 elective 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 a wide variety of 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 likes gridlock.

“It’s not because of any particular ideology or policy,” said Jeffrey A. Hirsch, the almanac’s chief editor. “It’s because you have two competing parties pushing against each other.”

That 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 is clearly 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 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 gain for the Dow – probably isn’t in the cards either.

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

Of the other possible alignments, during periods in which a Republican president ruled with either a GOP-controlled or split Congress, the Dow notched average annual gains of 6.7%.

The combination of a Democratic president and a Democratic-controlled Congress fared the worst of the six possibilities, although only slightly so, with a 6.6% average annual gain for the Dow. In other words, pretty much of a wash.

From the Money & Co. blog at latimes.com/moneyandco.