VOL. 127 | NO. 173 | Wednesday, September 5, 2012

The 2012 presidential election has two widely contrasting visions, larger than life personalities, and plenty of high praise and low blows. Over the next three months, the contest for the Oval Office will dominate American discourse. However, while the big game for the country may be the presidential race, the big game for the markets will likely be the Senate race.

There are six possible governance structures in Washington. Presidents can be Republicans or Democrats and Congress can be controlled by either party or controlled by no one (like today). While the president may request the laws, Congress creates the laws. Typically, party gridlock appeals to investors as a tougher legislative environment means less spending, fewer regulations, and more tax policy consistency. But after years of major fiscal can kicking, the country faces certain recession if congressional leaders cannot agree on spending and tax reforms to avoid the “Fiscal Cliff.” As we approach 2013, investors would prefer a more productive legislative environment to avoid the current automated recession. For a fully functional Congress, we need one-party rule.

The House of Representatives today consists of 241 Republicans and 194 Democrats, giving Republicans control. Forecasting site Intrade places a 90 percent probability on continued Republican control in 2013. Conceding the House to the Republicans leaves us with four possible governance structures.

The United States Senate today consists of 53 Democrats and 47 Republicans, giving Democrats control of the Senate. Thirty-three Senate seats are up for re-election. Of those 33, 23 belong to Democrats and 10 belong to Republicans. Forecasting site Intrade places a 54 percent probability on Republican control in 2013. Conceding the Senate to the Republicans leaves us with two possible governance structures.

Intrade places a 56 percent probability on an Obama victory, although national polls have Obama only ahead by a slight margin. Either way, if the World Wide Web wizards are correct, we are down to one possible governance structure: Democratic White House and Republican Congress.

Now we can pair governance combinations back to 1900 with annualized returns. I have ranked them by probability based upon my Internet browsing:

Note that average returns for a Republican Congress equal 8.3 percent, Democratic Congress 4.75 percent and a split Congress 2.6 percent. The most successful combination has been a Democratic president and a Republican Congress. The least successful combination has been a Republican president and a split Congress. Those who prefer Romney and investment returns should pray for a Republican sweep in November. Those who prefer Obama and investment returns should hold their noses and vote Republican for Congress.

Unfortunately, the sample space of return history is statistically insignificant. Nonetheless, the analysis is interesting, if not vote provoking.

David Waddell, who is regularly featured in the Wall Street Journal, USA Today and Forbes, as well as on Fox Business News and CNBC, is president and CEO of Memphis-based Waddell & Associates.