The mid-term elections are over, the markets are back to their bullish self, and the sky is not falling.

Wall Street extended its November rally earlier this week, carrying the Dow Jones industrial into new territory as investors anticipated a business-friendly outcome of the mid-term elections and bought stocks across the market.

In Tuesday’s Congressional elections, the opposition Democratic Party regained control of both the House and Senate, leaving the legislature in Democratic hands and the presidency in Republican hands; with legislative gridlock the likely outcome.

Stocks often rally on elections as Wall Street bets change will lead to an environment more favorable to business. The prevailing wisdom is that a split in power in Washington will create legislative gridlock, slowing down regulatory change.

Some investors ran for cover Wednesday as stocks fell early in the day as the election results became known. Still, a pullback in stocks was to be expected after back-to-back sharp gains for the major indexes this week.

Although professional investors are often viewed as being politically conservative, Wall Street likes what many voters hate: gridlock. The market likes to alleviate as many risks as possible, so a “non-activist” government is often seen as one less variable businesses must contend with.

“Gridlock is good, Wall Street doesn’t like change,” said one senior Washington analyst. “You’re not going to have runaway spending increase, you won’t have a repeal of the Bush tax cuts, and there’s no legislative change that will roil industries.”

Mind you...Wall Street investors and analysts don’t often agree on much of anything. Is gridlock good? Some think a political stalemate will be mostly bullish for the economy and for the stock market.

Others noted that regardless of what happens in Washington, corporate earnings and economic growth will continue to drive the U.S stock market rally to five year highs. Still others see the “gridlock is good” idea as a myth.

“What creates good markets in the face of gridlock is not gridlock,” said one New York chief investment officer. “It is other factors. Is the outcome of this election going to matter as much as housing, oil prices, the Federal Reserve or China? The answer in my view is no.”

An academic analysis of long-term investment trends showed that stock markets do not necessarily thrive during political gridlock. In fact, the study showed smaller companies actually thrive when there is no gridlock and the Congress and President work in harmony.

The study, which analyzed ten stock indexes and periods of political gridlock from 1949 through 2004, found that, adjusting for inflation, annual returns in gridlock periods averaged about 6%. In periods of political harmony, annual returns averaged about 22%.

For the smallest companies in the study, the difference was even more pronounced. During periods of gridlock, annual returns averaged about 4.7%, while in years of political harmony annual returns averaged 27%.

“That sort of suggests when the government is in unity and can work together it actually does things to help businesses and small stocks,” said one of the study chairs. “Even in the 1990s there were times where small-stocks did better during the 2-year window when President Clinton actually had a harmonious Congress.”

So...what does the current political landscape look like for Wall Street? Frankly, I don’t think it changes things very much at all; at least not for penny stock investors. Penny stock investors do not follow trends...and we certainly don’t hang our investment strategy on political gridlock, political harmony, or any other investment legends.

R.I.S.K. is not a dirty four-letter word for penny stock investors. If anything, political uncertainty is more harmonious with our investment strategy.

But increased risk may be something that the rest of the herd needs to get use to.

A seasoned investor with a keen interest in international business and current affairs, John Whitefoot has been working alongside Peter Leeds for the last several years. With over ten years experience in the investing community, Whitefoot is devoted to uncovering the news, trends and ideas that shape penny stocks on a daily basis.