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Divided government may be hard for Joe Biden, but it should be good for the stock market, experts say

Divided government would be "excellent for the economy and it's excellent for the markets."

President-elect Joe Biden delivers remarks at The Queen in Wilmington, Delaware, on November 10, 2020.
Angela Weiss | AFP | Getty Images

Former Vice President Joe Biden is now the president-elect of the United States, NBC News projects, after securing at least 279 electoral votes, above the 270 threshold needed to win. But when the longtime policymaker is inaugurated in January, he could face a divided Congress.

Republicans currently hold a 53-47 seat majority in the Senate. Democrats gained one new seat in the 2020 elections that have so far been called, bringing the balance of power to 52-48. Control of the Senate is likely to be determined by two outstanding races in Georgia, scheduled for runoffs on January 5.

The first runoff features Republican incumbent Sen. Kelly Loeffler, who garnered 26% of the vote, edging out competitor Doug Collins. Democrat Raphael Warnock secured 33% of the vote but Georgia's majority-vote requirement means a candidate must get at least 50% to win outright.

The second race is between Republican Sen. David Perdue and Democrat Jon Ossoff, whose vote tallies stand at 49.7% and 47.9%, respectively.  

If Republicans keep the Senate, control of the executive and legislative branch would be split between parties. That would be frustrating for the Biden-Harris administration, but market analysts agree a divided government should be good for stocks.

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Markets have performed well in political 'gridlock'

Historically, markets have performed well when there's political "gridlock," Wharton Professor of Finance Jeremy Siegel told CNBC recently. Since 1944, he said, the index has rallied more than 13% on average during a calendar year under a Democratic president and split Congress.

"Gridlock doesn't mean nothing will get done," according to Siegel. A Biden presidency and potentially Republican Senate is "excellent for the economy and it's excellent for the markets."

It can be useful to have to reach across the aisle, Siegel says. "He's going to have to work with a Republican Senate to get something done. In the meantime, the Republican Senate is going to block any radical tax plan or anything that comes from the House. Hey, what more do you want?"

Last week, stocks surged as the likelihood for a split government drew closer. The S&P 500 was up more than 7% at 3,509 and the Nasdaq rose 9% to reach its best weekly performance since April. Stock markets rallied sharply on Monday after Biden was named president-elect over the weekend and have been trading higher on the news of a potential coronavirus vaccine.

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Take the long-haul perspective

If you're worried about your investments as stocks remain in flux, keep in mind that markets tend to go up over time and have during nearly all presidential administrations. But it's also important to remember that markets can move suddenly in either direction.

Shore up your portfolio with a diverse mix of stocks, bonds, and other vehicles, experts say. While some areas of the market may tumble, there's a good chance you'll still have holdings in industries performing well if your investments are varied and spread across different sectors.

If you have a number of years to invest ahead of you, it's good to maintain the long-haul perspective. CNBC Senior Markets Commentator Michael Santoli told Grow last week that markets like a divided government because in our democracy, "radical policy changes can't happen without consensus." A split Congress "creates more incremental economic and fiscal policies."

Still, he cautioned, look at the full picture before making any moves: "The average person should not place policy expectations at the center of their investment plan."

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