S&P’s Sam Stovall: Gridlock in Congress Harms, Not Helps, Stocks

Stovall says that historical data show, ‘Gridlock generates uncertainty, and Wall Street hates uncertainty’

Standard & Poor’s chief investment strategist, Sam Stovall, came out Friday against polarized political posturing in Washington—a notable event considering his employer’s threat to downgrade U.S. debt if the debt-ceiling debate goes unresolved after Aug. 2.

While many people believe that gridlock is good for the stock market, reasoning that Washington would then not get in the way of capitalism, history shows that the opposite is true, says Stovall (left) in a U.S. sector watch for S&P’s Equity Research unit.

“From Dec. 31, 1899 through July 28, 2011, the average annual price advance for the S&P 500 during years when Congress was split was less than half that of when the President and Congress were from the same party,” Stovall notes.

Since 1900, when Congress is split, the S&P 500 has risen 3.2% per year, versus 7.7% under a unified government scenario, Stovall writes. “The rationale behind this sub-par performance could be that gridlock generates uncertainty–as Congress impedes, rather than leads–and Wall Street hates uncertainty.”

Under the heading "Market Mayhem," Stovall writes that as a result of the debt ceiling impasse, global sector performances are mostly in the red this month. Across the board, in the S&P Global 1200, S&P 500, S&P MidCap 400, or S&P SmallCap 600 Indices, declines have been seen in the Consumer Discretionary, Financials, Health Care, Industrials, Materials, Telecom Services and Utilities Sectors, with five of the 40 sectors registering declines in excess of 6%.

“Washington grumbles, Wall Street stumbles,” Stovall concludes. “Once again, history repeats itself. We still believe in 11th hour miracles, and think recent share price declines will be quickly recovered when the debt debate concludes. What will take much longer to recover, in our opinion, is our confidence in our national leadership.”

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