What the new Congress means for you?

What does the new Congress–with a Republican controlled House and Democratic controlled Senate–mean for your investments?

In my mind it’s too early to answer that question. While we will almost certainly be dealing with some measure of the gridlock we are so accustomed to in D.C., I worry that gridlock will be paramount in the two month lame duck session before our newly elected representatives and Senators take their oaths. If so, we will wait for answers to our most pressing questions: Will the Bush tax cuts be extended? If so, for whom and for how long? Will the estate tax be allowed to be reinstated at pre-2009 levels? Trouble is, if our representatives fail to address these questions by the end of the year, taxes will increase for nearly everyone unless a retroactive provision is passed.

As for the election’s impact on the investment environment, market commentator Todd Schoenberger has noted that we are closer to the optimal formula for investment success of a Republican-controlled House; Republican-controlled Senate; and a Democrat in the White House. Going back to back to 1940, he says the RRD combination has provided investors with an average stock market return of 15.3% per year, whereas the DDD combination we’ve had for most of this year has lifted stocks only 5.0% on average.

Wall Street Journal writer Brett Arands reminds us, however, that the historical basis for this analysis–data since 1949 via the Stock Trader’s Almanac–is meager. I agree with Arands’ observation: “You can’t extrapolate universal rules from such a small amount of data. The results are too heavily skewed by the Reagan (1981-86) and Clinton (1995-2001) booms under divided governments.”

Could it be we are falling into the behavioral trap of identifying pattern where none exists in order to help ourselves feel more in control? I certainly don’t blame anyone for desiring a measure of predictability in the wake of such recent volatile markets, but markets are just that–unpredictable.

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