Investors are nervous as the U.S. presidential election approaches. The S&P 500 is about 10% below its all-time highs. The VIX Volatility Index is back up near 30. The popular Wall Street wisdom is that the best outcome in Washington is gridlock. Investors perceive that when one party has hegemony -- which we define as controlling the presidency, House, and Senate simultaneously -- ideology supplants pragmatism and compromise; expensive and impractical legislation is passed; and the market suffers. Our analysis of S&P 500 performance since 1945 does not substantiate that widely held perception, however. Our work suggests that the market has actually outperformed in years in which one party prevailed, though the results fail to establish a clear pattern. We start with the base-line annual average market performance since 1945 of 10%. Political scenarios that topped this average included a Republican president and Congress (+11%), and Republicans controlling the White House and either the House or the Senate (+11%). But, in years in which the White House was occupied by a Democrat, stocks also outperformed (+11%). Heading into this election, current odds favor a Democratic president, a Democratic House and a toss-up for the Senate. At stake is a party's ability to set tax and fiscal policy and a trade and regulatory agenda, while also selecting the Cabinet and members of the Federal Reserve. Indeed, there's a lot on the line.

Buy the rumor, sell the news. That seems to be the strategy for investors in election years. Our study of returns since 1980 found that in the third quarter of election years, stocks rise on average 1.4%. That compares to a non-election year change of 0.8%. In the fourth quarter of election years, we found that stocks slip 0.1%, compared to gains of 5.4% in non-election years. Why? Generally, investors favor continuity, and an election year offers a real opportunity for change. At the beginning of 2020, the odds were favoring another term for President Trump. But in the wake of the pandemic and recession, the odds now favor former Vice President Biden. Should Trump win, industries likely to benefit could include Aerospace & Defense (which have done well under his presidency) and Energy (which has not, despite favorable regulations). Our top picks in these groups include Lockheed Martin and Northrop Grumman, as well as Enbridge Energy and Valero Energy. Should Biden win, sectors such as Clean-Tech, Med-Tech and Business Services may do well as regulations change. Our top picks in these groups include First Solar, Badger Meter, Honeywell, Tesla, Roper, Catalent, BioTechne, Automatic Data Processing, Fiserv, Xcel Energy and NextEra Energy.

Fiserv is a leading provider of information management and e-commerce systems for the financial services industry. Services include account processing and management, online bill payment and presentment, mobile banking, and debit card transaction processing.

Stocks were mixed on Monday morning as investors weighed new earnings reports and the details of President Trump's executive orders on coronavirus relief, which circumvent congressional authority and raise a range of legal and constitutional questions. The president's orders call for $400 per week in enhanced unemployment benefits, though these benefits would likely last for only a short period. Making the payments would also be logistically complex and require a $100 per week contribution from financially hard-pressed states. The Dow rose 0.9%, the S&P fell 0.1%, and the Nasdaq fell 0.9%. Crude oil traded near $42 per barrel, while gold rose $16 to $2044 per ounce.