IS GRIDLOCK GOOD FOR THIS MARKET?
There’s a lot of discussion on Wall Street about the positive impact on stocks if there is gridlock in Congress. The idea is that Obama’s anti-business, big government, tax the rich administration will be forced to move more towards the center and that means a more business friendly environment. Unfortunately, it’s a bunch of nonsense – particularly in this environment. Fidelity Investments ran the numbers and found that there is no positive correlation between mid-term elections and gridlock:
“The theory that inaction caused by political gridlock—where the U.S. Senate, U.S. House of Representatives, and White House are not all controlled by the same party—is often considered “good for the market” does not appear to have much historical support from stock-return data following midterm elections. Large-cap stock returns during post-midterm election years have been about the same, whether or not the outcome resulted in gridlock or harmony (i.e. one party controls both houses of Congress and the White House). Small-cap stocks, meanwhile, outperformed in years of political harmony compared to gridlock.”
Stocks, it seems don’t care who is in office during the year after a mid-term election. They have tended to rally in the third year of the presidential cycle no matter the make-up of government:
“U.S. midterm elections typically have kicked off a period of strong gains for U.S. stock investors. Consider the period from 1950 to 2009. During the year after a November midterm election, average annual returns for large-cap stocks were 23.4%, more than twice the 11% average from 1950 to 2009. Likewise, small-cap U.S. stocks returned 31.2% versus the long-term average annual returns of 13.5%.”
Of course, there’s a caveat here. This isn’t your average economy. The period between 1950 and 2009 was unusually calm. There were no major financial crises, the US economy grew steadily and aside from a few multi-year bumps in the road there was nothing devastating of the magnitude similar to the current crisis.
As of yesterday the Intrade contract for the Republicans winning the House was at 83%. This contract has been on a tear as 2010 has progressed and economic conditions have remained weak:
The contract for the Republicans winning the Senate is less decisive, but also on the rise at 45.7%:
Based on this data it looks highly probable that gridlock is coming to Washington. Unfortunately, that likely means that we won’t get much done in the coming two years as the Republicans will be anti spending and hesitant to give Obama any major economic victories that he can promote in 2012.
The problem with gridlock in this environment is that government steps entirely out of the picture. Now, we can quibble over whether that is a long-term positive or negative, but one thing is clear – over the last 18 months government has done an enormous amount to keep this economy from sinking into the abyss. That positive effect is turning into a negative effect as we speak:
What does it all mean? It means the private sector is going to have to remove the training wheels and see if they can right this economy without the aid of government. With the likelihood of continuing de-leveraging, high unemployment, stagnant economic growth and no government aid the likelihood of gridlock being a net positive in 2011 and 2012 is low at best.
I cant wait to see this market if it turns. I am on the sidelines now, but it feels like a coiled spring. All assets move in the same direction. Everything is highly correlated. If it turns it will wipe out a lot of people fast.
now that it is evident that hope and change means waste and tax, i welcome gridlock.
if the only way to “stimulate” the economy is building bullet trains from LA to vegas…..and paying teachers salaries in underwater states to keep them from letting them go…..then i don’t want it…..let us struggle our way out then.
wasted stimulis or off the austerity cliff are your active choices….but gridlock gets you NO mistakes…i’ll take it.
cullen roche printing money as long as the inflation stays low and spending it wisely sadly is NOT a choice we can make.
so i’ll take no choice
More than a third of the stimulus was tax breaks, much of the rest was to shore up state budgets. There hasn’t been much infrastructure spending, though it is badly needed. Yeah, fire all the teachers! That will do wonders for the economy long-term!
“Gridlock gets you no mistakes.”
Not making a decision is, in fact, a decision. If you’re standing on the train tracks with a train bearing down on you, staying put is a pretty big mistake.
Half of that “third” to which you refer was the “Make Work Pay” nonsense. It amounted to $30 or so per paycheck, and the only people who qualified for it didn’t pay any income tax to begin with. Since those people have no money anyway, the impact of this “tax break” was negligible. Another $100 billion went straight to the Teacher’s Union.
It’s one thing to say that we need to spend money to get things going. I agree with that in principal. It’s something different when the money is spent stupidly by corrupt politicians who are taking advantage of the crisis to pay off their supporters. As someone on this board recently said, it’s not like TPC is going to be the one deciding how stimulus money should be spent.
Standing on the tracks may not always be the smart thing to do, but if moving off the tracks means jumping off the trestle into the rapids below, then the choice becomes a bit more opaque.
Skateman, don’t bother.
The comments usually reflect some facts. You are not supposed to state facts that don’t fit the narrative.
For example:
“Under Bush … government employment grew by 1,753,000 jobs”
“Under Obama … [t]otal government jobs, however, shrank by 357,000 job”
Yet the article starts with “Obama’s anti-business, big government, tax the rich administration”
Now that I’ve said that, I’ll be told that I’m a Democrat, a Socialist, a Commie or the Antichrist.
P.S. I intentionally did not include a reference for the quotes. Look up the numbers.
You also didn’t bother to read TPC’s post too closely. Had you bothered, you might have detected the subtle use of sarcasm.
Mike,
I read everything TPC says very carefully. But subtle sarcasm is not enough. Facts matter. His words are taken literally from most of the crowd. It seems to me that he goes along with a lot of stuff, not because he believes it, but not to piss off some readers. That changes the conversation and people arrive at wrong conclusions.
Well, you’re free to start your own blog where you can force readers to come to a conclusion with which you agree.
Incoherent response.
What I’m saying is:
The premise should be based on facts, not beliefs.
When the premise is wrong the conclusion is wrong.
You are free to disagree with the concept of gravitation as well, but it is a fact. Ignoring it would lead you to wrong conclusions(don’t try jump off a building, you can’t fly).
His words are taken literally from most of the crowd.
And after he presents those words, he attacks them immediately thereafter.
It should be pretty obvious that this piece is not arguing in favor of gridlock. I’m not sure what you’re upset about.
Cognitive bias
People see what they want to see. That is why facts are important. They provide a reality check. If believes trump logic, fact and reason we are going back to the dark ages. The facts in the statement do not match with reality. That is all I’m saying.
People see what they want to see.
You’re a good example of it. You’re seeing something in the piece that isn’t there.
Take some personal responsibility what is your rather obvious misinterpretation of the piece. You seem to be one of the only readers who doesn’t understand it.
I directly asked TPC if he thinks that “Obama’s [administration is] anti-business, big government, tax the rich” and he refused to answer. So don’t tell me I’m paranoid (missed that accusation above) when the author refuses to take a position on his article.
TPC, since no-one is willing to accept numbers as sound economic argument, how about a separate article on Obama’s administration economic policies (no politics) compared to the previous administration(s)?
I think it will be beneficial to all to see the government employment numbers, taxes and US economic performance from your perspective.
Thanks
“Dimm”
Does anyone else see the irony here?
He answered your question. You must be too, er, dim to understand his response.
You clearly have a problem with reading comprehension, at least on this thread. Take ownership of it, and do something about it. Don’t blame others for your failure to understand it.
Dimm> “Under Obama … [t]otal government jobs, however, shrank by 357,000 job”
I get it. Obama is causing our extended economic troubles because he wants force state and local governments to terminate their excessively bloated payrolls.
This is a silly conversation. First off, I voted for Obama so lets just get that out in the open before you start making subtle jabs based not on facts (hmmmm).
The truth is, a lot of people view this administration just as I described it. Yes, I am being a bit sarcastic and general, but it’s the truth. Obama has been seen as a regulator, a big spender and a “spread the wealth” kind of guy. Now, if you’re a regular reader you know that I am not necessarily against all of that, but that doesn’t mean a lot of people don’t view it all negatively. After all, why do you think the Repubs are SURGING in the polls? People are getting tired of seeing govt screw everything up so the response is extreme.
TPC,
Just to be clear to all.
Are you saying that “Obama’s [administration is] anti-business, big government, tax the rich” as a fact (no sarcasm)
Or
People wrongfully believe that “Obama’s [administration is] anti-business, big government, tax the rich” (sarcasm)
?
I am saying it’s likely somewhere inbetween, but who am I to judge? Politics is not my strong suit or even necessarily an interest of mine so feel free to throw my political opinions out the window….
You are very good at avoiding a straight answer (said with admiration). You should have become a lawyer or a politician
I am just being honest. I don’t think Obama is necessarily anti business or even too big government, but he certainly dabbles in both of the above depending on the situation.
I think you want to view things in black and white and that is just not the world we live in.
I know I tend to give a “it depends” answer often time, but that’s the truth. It usually “depends”.
always fascinating to me that Republicans claim that Democrats are bad for the economy, and yet the stock market always eventually responds more positively to Democrats in power. Is it that Democrats run bigger deficits? Well….take a look at what Reagan and Bush II did compared to Clinton on the spending side. All very weird.
funny how clinton’s stock run up came after repubs took over congress in his first midterm.
words> always fascinating to me that Republicans claim that Democrats are bad for the economy, and yet the stock market always eventually responds more positively to Democrats in power
Do you look at the president’s party as the party in power?
Since the congress has the power of the purse should you consider the party in control of congress as the party in power?
Should you look at returns from the day politicians take office, from the day they are elected or the day the polls show they will obviously win?
The statistics can be massaged to get you the outcome you prefer.
Economy is a very complicated system, to pick two things and say they are either correlated or not correlated is very stupid. I would say a republican congress is the only thing that could stop this market from going higher, I couldn’t think of any other honestly.
Why do you have to post things like this and make people confront facts instead of relying on head in the sand / old playbook thinking?
So disappointed.
TPC,
I agree with you on this. When we are in a leveraging environment and an independent Fed is full of policy bullets, then gridlock in Washington is mostly (but not always) a good thing.
When we are in a deleveraging environment and the Fed had exhausted it’s policy options then gridlock is mostly (but not always) very dangerous.
I really enjoy reading your posts and agree with a lot of them. However, in this case, I think you are right about gridlock not being good, but for the wrong reasons.
You say the government did a lot to keep the economy out of the abyss, but actually,they have just prolonged the pain. Had they not interfered,and allowed the losers to lose, yes, the economy would have crashed deeper. However, assets would have found their true value, debts would have been wiped out as the true losers lost, and the economy would have found it’s true bottom. There would have been plenty of people and lots of capital left to pick up the pieces. the economy would have then rocketed back up just as fast (like most recessions pre and post WWII) and this recession would have been over in six months, clear of most of the bad private debt you are are always correctly saying is dragging us down.
The real reason that gridlock right now is bad and we are on our own is that a split Congress will be unable to undo any of the damage done by the current congress and restore some certainty to the economy until after we (hopefully) get a new administration in 2012. There is no hope for the next few years,in my opinion, unless the GOP wins both houses. Then, a president how wants to be re-elected will move to the center and some of the damage can be mitigated.
Randall, Having assets find their “true value” did not work in the first 3 years of the Great Depression. All it did was cause misery and depression. Why do you austerians think it would work now?
It is things like FDIC and stimulus that makes us in a better place than what we were in the liquidationist age. Roosevelt’s legacy is still with us.
“There would have been plenty of people and lots of capital left to pick up the pieces. the economy would have then rocketed back up just as fast (like most recessions pre and post WWII) and this recession would have been over in six months.”
This is an assumption which isn’t based on anything substantive. This recession is like nothing in the post WWII period, save Japan. There was a danger that if the government didn’t cushion the blow (through stimulus spending and low rates), the blow would prove fatal as the economy went into a deflationary debt spiral (RGDP down 30% like the Great Depression). 100% probability? No. But a risk that probably wasn’t worth taking.
Is it the government’s policies that are keeping the U.S. economy from reverting back to the old normal? I don’t think so. I think it’s the private sector’s need to deleverage, plain and simple. This will take time regardless of what the government does or doesn’t do. Frankly I don’t think gridlock or no gridlock really matters all that much at this stage.
I would say that everyone has his pet explanation of what caused the depression, but I have not seen anyone so far present the arguments in a way that I say – here you go that is the best explanation. In any case, I think Milton Friedman got it wrong. (Irving Fisher’s explanation seems reasonable to me and I do not think it is against Austrian views). Actually if one had used the Swedish model this time, losers would have lost and you would have the same or even better results right now.
Too much debt caused the depression. That’s no pet explanation.
It’s a mistake to view this as a recession. A normal cyclical downturn, what we referred to as recession in the past, has not been allowed to happen for quite some time. The Fed, mainly under Greenspan (but now Bernake is guilty of the same thing, i.e. an unwillingness to let things play out naturally), refused to allow the normal and natural cycles to take place. What we are experiencing is the after-effects of a massive FRAUD. This is what happens when a ponzi scheme blows up. Historical comparisons fail unless compared with other ponzi credit schemes.
Apparently, absent these ponzi schemes, the US is incapable of what we would consider to be normal growth. That truth/reality is unacceptable to far too many people – especially those in power. Thus the need for steroids, and the resultant bubble after bubble, bust after bust. No matter how hard we try to pretend things aren’t so, the world has changed and the pace of change continues to accelerate. The sun is setting on the USA as we knew it, for a number of reasons that most of you understand and know all too well (e.g. losing it’s manufacturing base). Those jobs aren’t coming back. The fundamental, structural imbalances are not being addressed.
I doubt that there IS a solution. e.g. Had the USA passed laws preventing the megacorps from relocating their plants, would that not have just delayed the inevitable or had other undesirable consequences? The “cure” (if there is one) is definitely beyond monetary policy, and the types of fiscal policy changes that MIGHT help, are beyond the capabilities of politics in it’s current state. A responsible, non-corrupt, informed congress might make a difference – but that simply isn’t going to happen anytime soon. Chris Whalen spoke about this in his AEI speech, and opined that it would take 2 or 3 election cycles to rotate in enough different-thinking politicians to implement structural changes. I think he’s being far too optimistic.
The question of whether or not gridlock is a good thing is for the most part irrelevant. At this point, it makes no difference who is in power or what the balance of GOP vs. Dem power is. The political system is far too corrupt for it to matter which party those in congress belong to.
Money has become everything – not doing the right thing for the people. What you CAN get away with vs. what you SHOULD. And that really is the problem, folks. Unethical, immoral behavior is rampant. (e.g. Foreclosure gate shows to what extent the USA has become a lawless society – those in charge of justice don’t even have the will (or are too corrupt) to stand up for it anymore). If you ever needed proof of this reality, the events of the past 3 years offer it in spades: massive wealth transfer to the elites, paid for by the middle class. And it continues each and every day. A moral govt and Fed would not have saved Wall. St. while sacrificing Main St., would not have punished the prudent in favour of the risk takers, would not be punishing SAVERS in favour of reckless spenders, etc., etc. And now THEY have learned that they can get away with ANYTHING. There is seemingly no limit to what the masses will put up with.
John Mc and Angry MBA,
you are just being childish now. One can refer to you as John Mc-cain and Grumpy. How exactly that would prove an economic point?
There needs to be a revolution french style then I will begin to actually vote.