NEW YORK — Next year will be a year unlike any other for the stock market.
The Republican takeover of the House of Representatives on Tuesday means Wall Street will be contending with three situations in 2011 that drive stock prices:
* The year before a president faces re-election.
* The year after a president has lost control of Congress.
* The second year of a f ragile economic expansion.
The market often behaves a certain way in each of those situations, but history isn't helpful now because investors have never faced this trifecta before. What's clear is that what happens in Washington will be watched even more closely by investors next year.
Here's a look at the three situations coinciding next year and how they could affect the stock market:
* THE YEAR BEFORE A PRESIDENT RUNS FOR ELECTION:
Since 1945, the Dow Jones industrial average has gained an average of 19 percent the year before a sitting president runs. That's more than double the 7.9 percent average annual gain during the same period. If you take out the 10 years when the president was running, the average gain drops to only 5.8 percent.
* THE YEAR AFTER A PRESIDENT LOSES CONTROL OF CONGRESS
Presidents whose party controlled both houses of Congress have lost at least one chamber five times in the past 80 years. Stock returns in the following year haven't followed a pattern. The Dow plunged 53 percent in 1931 and gained 34 percent in 1995. Gains in the other three years ranged from 2.2 percent to 20.8 percent. That makes it impossible to forecast what will happen this time.
* SLOW-GROWING ECONOMY
The economy is growing at a 2 percent annual rate, according to the latest estimate by the Commerce Department. That's slow by historical standards and shows that the end of the recession 17 months ago hasn't translated into a robust economic expansion.
Stocks have been in a bull market for 18 months, pushing the Dow up 70 percent since it hit a 12-year low in March 2009. That gain is larger than normal but isn't surprising considering that the rally followed the worst financial crisis in decades. During slow recoveries like this one, bull markets typically last 30 months and bring gains of 44 percent overall, according to Ned Davis Research.
So what's an investor to do given this abnormal year? The best thing may be to follow your long-term plans regardless of what happens in Washington.
"There's no way to tell what's going to happen, or we would all be rich," says Paul Larson, the chief equities strategist at Morningstar.