Divided Government and the Stock Market
56 Pages Posted: 7 Dec 2022 Last revised: 26 Dec 2023
Date Written: November 27, 2022
Abstract
We show that during United governments, where the same political party controls all of the White House, Senate, and the House of Representatives, the U.S. stock market earns substantially higher equity premia and the U.S. economy experiences higher economic growth than during Divided governments. We refine the presidential puzzle (Pastor and Veronesi, 2020) into a Divided-Republican government puzzle since Unified-Republican presidents earn comparable or higher equity premia than Democratic presidents from either government. Small firms are severely affected by this government cycle, as evidenced by SMB difference of 7% per annum. We use close-tie election results to infer causality.
Keywords: Divided Government, Government Puzzle, Presidential Puzzle, Stock Returns, Economic Growth, September Effect
JEL Classification: D72, E32, G12, G18, N12, N42
Suggested Citation: Suggested Citation