Throughout US history, the most dangerous time for stock markets has been when one party controls the White House and Congress, says Keith Fitz-Gerald. And when you account for inflation, it doesn’t really matter whether the Democrats or Republicans are in the driving seat.

This from Money Morning:

With the whipsaw trading we’ve seen of late, it appears that the U.S. financial markets are already chewing through the post-election honeymoon. I have to say that I, for one, am relieved that’s the case because it signals that the markets are already returning to normal.

I realize it may not feel that way, but there’s one very important thing to remember: We nearly always seem to receive the best news near, or at, market tops, and the worst news near, or at, market bottoms. Although that seems contradictory, it actually makes sense. And investors can take some solace in the fact that the mounting tide of bad news is an important part of the bottoming process.

Speaking of which, studies show that the most dangerous time for American markets (and U.S.-centric investors) is when one political party controls all the marbles. It doesn’t matter which one, either – Republican or Democrat. The reason is clear: Single-party control typically brings out the very worst in big government in the form of higher taxes, magnified spending, and even war. As my friend, economist Mark Skousen, recently noted, “every one of the major wars involving America occurred during one party rule: World War I, World War II, Korea, Vietnam and Iraq.”

According to studies conducted by researchers at Ned Davis Research, the best thing financially would be to have a divided government and gridlock. In short, the Dow Jones Industrial Average Index logs its biggest net gains with a donkey in the White House and elephants traversing the halls of the U.S. Capitol Building. During such periods – with a Democrat in the White House and a Republican Congress – the stock market generates an average return of 9.6% a year.

People assume that a presidential administration and Congress with matching political affiliations is the best way to get things done, but in reality, the checks and balances of a mismatched pair helps to ensure that governmental agendas don’t go to extremes. Thus, somewhat surprisingly, political gridlock is actually a reality that puts investors at ease and permits the financial markets to operate efficiently.

Obviously, with Democratic President-elect Barack Obama coming into office in the New Year, along with an even stronger Democratic Congress, we’re not going to have such gridlock-generated returns to look forward to.

But fret not: Another interesting conclusion suggested by our own research, and that of Ned Davis and other research firms, is actually quite promising. In stark contrast to what most investors believe to be true – that Republicans are better for the markets – the fact is that the blue-chip-dominated Dow tends to rise nearly twice as fast during Democratic presidencies (7.2%) as it does during Republican ones (3.8%).

The great equalizer, if there is one, appears to be inflation, which rapidly eats away the higher returns to bring them within a few basis points of each other over time.

And with the U.S. government having injected roughly $3 trillion in bailout money into the financial markets, an inflationary environment may well be in our future.

Rest assured, we’ll continue to monitor the markets and keep you informed of all the latest developments. In fact, if you haven’t already, tune in on our just-started “Money Morning Outlook 2009” global investing forecasting series.

Our “Outlook 2008” series was so well received that we ultimately published it as an investment playbook. This year, our series is even more comprehensive. We’ve already published our forecasts for the Obama Administration and how its policies may affect the U.S. market, for the U.S. economy and for the stock market. And we’re planning individual reports on gold, oil, housing, Latin America, China, retail sales, biotechnology, alternative energy, income investments – and more. Stay tuned to Money Morning.

Source: Market Milestones to Watch for in the Months to Come