Attention Gridlock Proponents: Be Careful What You Wish For
Over at "Money In The Morning," the new blog at The Hill, Walter Alarkon includes an article (subscription required) from WSJ.com that says Wall Street is rallying because of the prospect for gridlock the next two years. But yesterday in the New York Times, Jeff Sommer had a column showing that there's no evidence gridlock has been good for Wall Street over most of the past century.
As I said on CNBC last week, if you put partisan feelings and wishful thinking aside, it's impossible to attribute the rally in the Dow that occurred after the GOP takeover of the House and Senate in 1994 to the election results and the resulting stalemate between Congress and the White House. The rally was part of a much longer rally that began around 1983 and continued to 2000. Far more important, however, is that the run-up in the Dow after the 1994 election was more the result of the dotcom boom than anything that didn't happen inside the Washington Beltway.
The analysis in the WSJ article is suspect for a number of reasons. This quote, for example:
"There is a good chance that the strength we have seen in the market recently is due partly to an expectation about the result of the election," says Jason Trennert, chief strategist at Strategas. "Investors are starting to understand that a likely result of this election is gridlock, and that is good."
He notes that industries whose stocks make up about 40% of the value of the S&P 500—financials, energy and health care—have been raked over the coals by Congress this year. Wall Street is hoping Congress will ease up after the election.
Someone needs to tell Tennert that gridlock would work just the opposite way he's predicting for financials and health care. Legislation has already been enacted in those areas and the next steps are all regulatory and, therefore, largely beyond Congress' control. Congress could repeal those laws or pass restrictions on agencies and departments spending any money on promulgating regulations, but neither of those can happen if there's the gridlock Tennert says would be so good for the markets.
By contrast, Ethan Harris, the chief North American economist at Bank of America Merrlll Lynch, who is quoted in the NYTimes piece, has it right. The value of legislative gridlock to Wall Street depends completely on the economic context in which it occurs. If the economy is good (for example, if an important sector is booming as it was in the late 1990s), then nothing getting done may be a good thing. But, as Harris notes, if the economy needs tax breaks to be extended and perhaps other fiscal stimulus enacted because the economy is sluggish and actions by the Federal Reserve may not increase demand and create job, gridlock could be a real problem.