Many believe that Republicans will win back a large number of congressional seats and could even potentially win back control of Congress during the upcoming mid-term election cycle.  Accepting this as a likely reality, the question then becomes what the impact will be on the stock market, as a whole, as a result.

Traditionally, the third year of any presidential cycle has been positive for the U.S. stock market.  In fact, according to Mark Hulbert, as written in his October 4^th MarketWatch article entitled, “Who cares about gridlock?”, since 1945, the average gain of the DJIA has been 24.7% in the third year of a presidency compared to 4.0%, 1.9% and 3.3% for years 1, 2 and 4 respectively.  Drilling down further into this data, the table below displays the apparent affect of a split between the party in the White House and the party with Congressional control on the stock market.

Source: Mark Hulbert, “Who cares about gridlock?” MarketWatch, October 4, 2010

While there is a difference, surprisingly the difference is not a large as you might expect and all scenarios result in positive overall performance for the third year of a presidency.   Perhaps even more interesting is that the best scenario for the third year of a presidency appears to be a split government heading into the mid-term elections and a split government after the mid-term elections.  Gridlock, in this sense, is not necessarily such a bad thin