Best scenario - Dem prez, split Congress: Stovall

CFRA chief investment officer Sam Stovall, whose "Presidential Predictor" market gauge points to a Joe Biden win, tells Reuters' Fred Katayama that the combination of a Democratic president and a split Congress produces very strong returns for stock investors.

Video Transcript

FRED KATAYAMA: Tech stocks spearheading a torrid rally on Wall Street on Wednesday the day after the presidential election. The race is extremely tight. Now for some guidance based on historical perspective, let's turn to the unofficial historian of Wall Street, Sam Stovall of CFRA Research. Welcome, Sam.

SAM STOVALL: Thank you, Fred.

FRED KATAYAMA: Sam, it seems, though, the stock market didn't get it right yesterday when some say it was betting on a blue wave. But the stock market does have something called the presidential predictor. Tell us how accurate that is and what that's indicating this time.

SAM STOVALL: Sure, Fred. Well, the presidential predictor says, take a look at the S&P 500's performance from July 31 through October 31 of presidential election years. And since World War II, if the market was down, the incumbent was replaced 88% of the time, failing only in 1956. And this time around, the S&P 500 fell by less than 1/10 of 1%. So, obviously, pointing to, at face value, a Biden victory, but a very, very close one.

FRED KATAYAMA: Well, it looks like it's going to be a tight race either way, whatever the outcome. But it does seem more clear that a blue wave is unlikely at this point. So what does history tell us about the markets when the newly elected president faces a split Congress versus, say, rising on a blue or a red wave?

SAM STOVALL: Well, you're absolutely right. We did not get the blue wave. We ended up just getting a ripple. And so when you look to a Democratic president, we've had nine of those since World War II. Normally, November is down by 1/2 half of 1%. But December, you have the seasonal optimism kick in. And as a result, the market has gone up almost 2% on average, rising nearly nine out of every 10 observations.

But when you look to what about Congress, well, if you have a Democratic president and you have a split Congress, that actually has been the best scenario since World War II. It's happened only four times, however, meaning four calendar years. The S&P gained 13.6% on average and rose in three out of those four years. Primarily, they were under President Obama. Prior to him, we had never had a split Congress under a Democratic president.

FRED KATAYAMA: And if Trump were to pull a surprise victory and face a split Congress, what does that mean for the markets?

SAM STOVALL: Well, that ends up being a fairly mild return scenario. We've had 10 years since World War II in which we've had a Republican president and a split Congress. Average price change was a gain of 6% and frequency of advance or a batting average of 70%. So all of those numbers are lower for a Republican-led split Congress than for a Democratically led one.

FRED KATAYAMA: And Sam, looking at the year end, well, we saw a sharp selloff last week, but a sharp rebound this week. Going towards year end, you're still sticking at 3650, I assume, for the S&P 500. What do you see as getting us there post-election?

SAM STOVALL: Well, 3650 is our 12-month target. But we do think that we are seeing the bull market resume its advance. Typically, after we have gotten back to breakeven from a bear market, the market tends to give back some of those gains out of exhaustion. But the decline on average has been just a little more than 8%. This time around, we were down 9.6%. But once that pullback has run its course, then the bull market resumes for an average of 36 additional months.

So as we look to December, normally, we have seasonal optimism, whether you have a Democratic or a Republican present. But in the following calendar year, you get only a mid single digit price appreciation under Republicans, but a mid teens under a Democratic president.

FRED KATAYAMA: All right, thank you, Sam, for your observations. Appreciate it.

SAM STOVALL: My pleasure, Fred.

FRED KATAYAMA: Our thanks to Sam Stovall of CFRA. I'm Fred Katayama in New York. This is Reuters.