This article examines the relationship between security returns and
“political gridlock,” which occurs when the U.S. House of
Representatives, Senate, and presidency are not controlled by the same political
party. The findings support the following conclusions: First, the common view
that equities prosper during political gridlock is a myth. Second, fixed-income
securities do prosper during gridlock. Third, large companies exhibit higher
returns than small companies during gridlock. Finally, the relationship between
gridlock and security returns is independent of monetary conditions; this
finding supports the existence of a unique “gridlock effect.”
Overall, political conditions are relevant for investors, but previous views
about their influence are misguided.