The U.S. House of Representatives this week resembles a clown car, with Republicans scrambling to elect a new speaker amid bitter factional infighting. As an investor, should you be worried? In a word…no.

The GOP controls the House, with 222 seats versus 213 for the Democrats. Because of their razor-thin majority, the GOP has struggled to choose a speaker, as conservatives battle with ultraconservatives. Congress has ground to a halt.

And yet, the financial press can barely stifle a yawn. Wall Street has been focusing on economic data, corporate earnings, interest rates, and inflation, while rolling its eyes at the political circus in Washington.

Below, I’ll explain why you should adopt a similarly jaded stance toward the dysfunction on Capitol Hill. The midterm elections may have produced divided government, but for investors, the aftermath is likely to be positive.

Clowns to the left of me, jokers to the right…

On Wednesday, while Rep. Kevin McCarthy (R-CA) was losing the sixth round of voting for the speakership, it was telling to me that the big story on CNBC wasn’t the political slugfest on the floor of the House, but the latest Institute for Supply Management (ISM) manufacturing data.

The ISM reported Wednesday that economic activity in the manufacturing sector contracted in December for the second straight month, following a 29-month period of growth.

The December Manufacturing Purchasing Managers’ Index (PMI) came in at 48.4%, 0.6 percentage point lower than the 49% posted in November and beneath the estimate of 48.5%.

Sometimes on Wall Street, ostensibly bad news is interpreted as good news. The contraction in manufacturing PMI is a sign that the Federal Reserve’s tightening is slowing the economy, which should cool inflation and in turn prompt the Fed to get less hawkish in 2023. The major U.S. stock market indices Wednesday closed higher on the news.

But U.S. stocks fell Thursday, as robust labor market data strengthened the case for the Fed to remain aggressive. The Labor Department reported that about 204,000 people applied for first-time unemployment benefits last week. That’s down from the previous week’s total jobless claims and only slightly below the pre-pandemic weekly average of 218,000.

The main equity benchmarks closed sharply lower Thursday as follows:

• DJIA: -1.02%
• S&P 500: -1.16%
• NASDAQ: -1.47%
• Russell 2000: -1.09%

And so it goes, with investors getting whipsawed by each new economic headline.

The do-little Congress…

As of Thursday evening, Kevin McCarthy had lost his speaker bid on the ninth ballot. His masochistic persistence has become painful, but perversely fascinating, to watch.

There’s a diminishing likelihood that the 118th Congress will get much accomplished. But Wall Street usually prefers a national legislature that’s gridlocked, as opposed to legislative activism that could cost investors money.

If you were to read a list of the major donors to Democrats and Republicans, you’d see the same names of corporate and Wall Street big shots. The business of Congress is business, and that holds true whether the Speaker of the House is Kevin McCarthy, Nancy Pelosi (D-CA), or Pee Wee Herman.

A recent analysis by U.S. Bank found that the outcome of the midterms exerts no major impact on post-election stock market performance. The study shows that markets have gained under nearly all combinations of political control for the White House, Senate and House.

The following chart tells the story:

As you can see, the stock market underperforms in years leading up to midterm elections but does substantially better after the balloting is over.

Going back as far as 1962, the average annual return of the S&P 500 in the 12 months before a midterm election has been -0.7 percent, versus an average of 8.1% for all years from 1962 to 2022.

Conversely, the S&P 500 has historically outperformed the market in the 12-month period after a midterm election, with an average return of 16.3%, regardless of any permutation of political control.

There’s a widely prevalent view that if Republicans do well in elections, financial markets benefit. But that’s a myth. As the U.S. Bank study asserts:

“The party or parties controlling Congress, and whether they change after a midterm election, is historically not an indicator of market performance. Our analysis shows that the health of the economy is a much more important factor than midterm election results. The last time the S&P 500 Index produced negative returns during the 12 months after a midterm election was 1939.”

That helps explain why, as Kevin McCarthy was being repeatedly humiliated on the floor of the House by his party’s extreme wing, the denizens of Wall Street seemed indifferent.

WATCH THIS VIDEO: A Look at 2022, With an Eye on 2023

The consensus of analysts is that the economy will cool this year, due to higher interest rates, but the strong jobs market might help prevent an outright recession. If this “soft landing” does indeed occur, stocks will enjoy an even greater tailwind in the coming months.

So ignore the political circus. Stay focused on the fundamentals.

And if you’re looking for further guidance in the year ahead, you should know that our analysts have compiled a special report of seven macro predictions for 2023.

The product of painstaking research, our report steers you toward quality, under-the-radar picks in a range of sectors. To download your free copy, click here.

John Persinos is the editorial director of Investing Daily.

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