Gridlock May Be the Most Bullish Outcome for Stocks

Pundits have long argued over whether Republicans (who dominated the White House from 1860 to 1932) are better for business than the Democrats (who dominated from 1932 to 1980 and recently, 2008 to 2024). Several charts show stock markets performing better under our Democratic leaders – ignoring the composition of Congress. Shown here in charts, gridlock (one-party controlling Congress, the other controlling the White House) is the best mix for market performance, because it provides checks and balances against too much federal mischief.

However, transition times in election years are hard to score, like the 2000 dot-com bubble, the 2008 financial crisis, and the 2020 COVID attack coming at the end of one presidency and the launch of another.

Most long-term investors ride out any crashes, but if you want to measure a president’s market impact, you have to decide on starting and ending points. Do you measure from: (1) election day, or (2) the start of the calendar year, or (3) inauguration day, or even (4) long before election day, when markets tend to anticipate the next president’s victory in advance? I’m sorry if this turns a clear debate into a complex study, but here are a few caveats for measuring presidencies, parties or market performance in their term:

1. VOLATILITY is a big deal, as big crashes can cause some investors to sell prematurely.
2. The content of CONGRESS at the time is also a big deal, as in the Clinton years, for instance.
3. How much the President cooperates with Congress also makes a big difference.
4. Most importantly, you also must account for inflation, which most charts don’t do.

So, all the historical charts of market performance based on Presidents and Parties are basically either woefully incomplete or worthless. It’s far better, in my view, to look at the policies passed in Congress during a President’s years in office. To measure presidential performance more accurately, we should:

1. Examine the Economic POLICIES passed by a President and Congress together. For instance, President Clinton and the Gingrich Republicans passed capital gains tax cuts and created balanced budgets, 1997-2001. Which Party – or both, or neither – should get credit for those surpluses.

2. Adjust all returns for inflation and volatility. Then combine these forces to rate presidential eras.

Here are three examples of how tax cuts created market strength under each Party since the 1960s:

Example 1: 1963-68: Tax Cuts Under a Democratic President and Congress (Kennedy-Johnson)

In “Taxes Have Consequences: An Income Tax History of the United States” (2022), Art Laffer and two other PhD economists (Jeanne Carnes Sinquefield and Brian Domatrovic) focused on the 110-years since the birth of the Fed and income taxes in 1913. Here is the first example of Democratic tax cuts:

From 1952 to 1963, the top income tax rate was 91%, resulting in slow growth under President Eisenhower, including three recessions (charted below), but Democratic President John Kennedy proposed a cut in top tax rates from 91% to 70% plus a cut in corporate taxes and trade tariffs. He was assassinated before his ideas passed, but Lyndon Johnson passed the “Kennedy-Johnson tax cuts,” and the nation prospered for the rest of the 1960s, creating the longest, strongest postwar recovery so far.

Example 2: Late 1990s: Tax Cuts Under a Democratic President and Republican Congress (1994-2000)

When the Republicans took over the House for the first time in 40 years (in 1994), President Bill Clinton changed his policy directives. He made dramatic statements, such as “The era of big government is over” and “This is the end of welfare as we know it,” and he meant it. He also cut capital gains taxes from 28% to 20% at the start of his second term, creating a growth spurt, not to mention five straight years of 20% or greater growth in the S&P 500, from 1995 to 1999. The end result was four-straight balanced budgets in the federal fiscal years ending 1998 through 2001, but then debt returned with a vengeance after 2001.

Example 3: 2019-2025: Higher Revenues Helped a Democrat (Biden) After a Republican Tax Cut

The Trump tax cuts passed in late 2017 and took effect in 2018. Trump’s final “normal” fiscal year was 2019, before COVID changed our world. Since President Biden did not repeal or change the Trump tax cuts, we now have what amounts to seven years of prosperity under Trump’s tax cuts, interrupted by one year of COVID shutdowns in 2020. Who gets credit for rising tax revenues and stock prices, Biden or Trump? Since 2019, annual revenues are up 51%, but federal spending is up even more, +57.6% in those same six years, with cumulative deficits of $12.6 trillion, 2020-25, averaging $2.1 trillion per year.

It is understandable to see spending rise 50% in 2020, the COVID year, but why did spending stay well over $6 trillion every year thereafter? The Consumer Price Index (CPI) rose 26.5% from September 30, 2019 – the last day of fiscal year 2019 – to September 30, 2025 (the last day of fiscal year 2025), while federal spending more than doubled the CPI rate, at +57.6%. Spending is the problem, not tax revenue.

And now we have the 2025 tax cuts starting to reward most households in the form of lower withholding taxes, greater tax refunds, and the repeal of taxes on tips, overtime, and some Social Security benefits. We don’t know yet how growth will follow, but I see a 5% GDP growth in 2026.