Many people have asked what effect this election will have on the stock market?  Of course, the first answer to the question of "what will happen to the stock market in the near term?" should always be "who knows."  But we can look historically at how the market has done in similar situations; according to Goldman Sacks, mid-term elections in general are positive for the market. Over the last 15 mid-term elections the S&P 500 has recorded positive gains for the following 12 months every time.  That dates to 1950.  The average first year gain is 18.1% with a range between 3% and 33%.  (With Gridlock Looming, Wall Street Stands to Gain.  Egan, Walt.  FoxBusiness.com 10-12-10)

The enemy of the Stock Market and business in general is uncertainty.  For the Stock Market to properly price a company it needs to have some idea of the future earnings and competitive environment for the enterprise.  When there is no clear picture of the environment (for example, regulatory, political and access to competitive marketplaces) the first instinct of the stock market is to discount, or lower the price for the stock based on reduced potential earnings of the entity. 

Mid-term elections often settle muddy waters.  Traditionally the party in control will lose seats in both houses (and that appears to be in the works this time around.)  When those seats are lost to the opposition the whole Congress moves toward the middle.  That tamping down of the idealism of the ruling party is seen as a good thing for business.  Laws and regulations can't be bum-rushed through the legislative process.  Compromise is required if anything is to get passed and the extremes of either the left or right are left out in the cold.    

The other less apparent benefit to the end of the election cycle is the end of the constant drumbeat about how bad things are in the country.  It is a natural campaign strategy of new candidates to talk down the status quo and how they can fix everything if only we were to vote them in.  This negativity creeps in to our thinking and our sentiment and since it is so repetitive by almost every commercial and campaign stop we start to believe it.  Now that the election is over maybe we'll hear some positive news.