The mid-term elections on Nov. 7 are now less than a week away. Polls indicate that Democrats are coming on strong. In fact, a Wall Street Journal/NBC News poll released today found that 52% of voters hope Democrats will control Congress vs. 37% who root for Republicans.
Looks like we may be in for a bout of governmental gridlock -- when opposing parties control the executive and legislative branches. Traditionally, investors cheer at this prospect (indeed, that may be one reason the market has fared so well in the past month). The theory is that when there is gridlock, the Federal government isn't able to get that much done and investors don't have to worry about pesky issues like healthcare reform, tax increases or major policy shifts of any kind.
That's the theory anyway. But it doesn't quite pass the smell test, if you ask me. Is it really the best thing for our country, economy and stock market at this point in time to have an ineffectual Federal branch? I don't think so...
Sure, simple numbers back up the gridlock gibberish. In an Oct. 25 report, The Schwab Center for Investment Research found that in calendar years in which there was gridlock, stocks returned 14.08%. But in years where the same party controlled the legislative and executive branches, the average annual return was 10.41%. Still, Schwab analysts conclude on deeper analysis, "There is no statistically significant relationship between political control of Washington and the stock market."
Truth is, a growing cadre of analysts, including the folks at Stock Trader's Almanac, are arguing that the mid-term elections this time around may have the most in common with 1994. That was the year when Clinton was President, Democrats lost control of Congress, and stocks fell in the five days leading up to the mid-term elections for the one and only time since 1934. The Almanac's analysts warn investors today, "enthusiasm that lifts stock prices may dissipate within days of the final tally." Hence -- even if there was a pre-election gridlock euphoria in the market lately, chances are you've already missed it.
Here's an even scarier take: Doug Roberts worried recently on Blogging Stocks that a Democratic Congress and Republican president could be a terrible combination for the stock market. He conjured up a future where a Democratic Congress is spending on social programs to earn fans in advance of the 2008 Presidential election at the same time President Bush continues to cut taxes to boost the Republican cause. The result would be even worse fiscal imbalances than we already have. That would inevitably lead to higher interest rates down the road, Roberts argues. Egads.
There's even a case building in these final pre-election days, that ever-confident Republicans may surprise us all by winning a majority in Congress yet again.
The market has had a great run in the past month. But one reason it has wobbled in recent days may be because investors are already starting to wonder if the "gridlock is good" theory is all its cracked up to be. Even if you still buy it, keep in mind, it is probably too late to play that investment card, anyway.
[Photo: Richard Summers]
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Reader Comments (Page 1 of 2)
11-02-2006 @ 9:37AM
richard kelso said...
Baloney. Gridlock is gridlock. Neither increased spending nor further tax reductions will see the light of day with a democratic Congress and a republican President.
11-02-2006 @ 4:36PM
Dr. Ronald C. Pilenzo said...
I agree with your contentions that a gridlocked Congress is bad for the markets. With the Dems in control of the house, the Dems will play the next two years with endless investigations, second-guessing, attempts to roll back tax cuts, and try to buy off the middle class with a $3,000 tax credit for college. Big Deal! On the other hand, they will take away more than they give with their opposition to the other tax cuts in place now. Look at it this way. The top 10 percent of the wage earners in this country pay more than half of all taxes. They are now paying 10 percent more than under Bill Clinton. Taxing them more and giving it to the poor is a dumb solution. In the end, the GOP may not have handled many of the Iraqi issues well, but would could? My word is hold onto your wallet if the Dems get in and lay the ground work for 2008. The market is headed for a real fall if the Dems take over. You can take that to the bank.
11-02-2006 @ 2:33PM
AG said...
I think the stock market will take a downturn overall until certainty kicks in letting people know that taxes will not be increased and neither will spending. As long as there is uncertainty on these issues the market will not thrive.
11-02-2006 @ 2:45PM
Joe Ryan said...
The Republican controlled Government raised the deficit by Three Trillion Dollars, cut taxes and failed to cut spending. Trust the "tax and spend" Liberals to solve the budget crisis?
We're in trouble! The two party system has failed.
11-02-2006 @ 2:52PM
DAN said...
What a lame attempt at another scare tactic by Republicans. She mentions the elections of 1994 and how stocks went down for 5 days before the election. WOW!!!!! Five (5) count 'em, FIVE WHOLE DAYS. Wow, what a crash that was.
What this poor attempt at a scare tactic just happened to leave out was that in the period of 11/01/94 to 11/01/95 the DJIA went from 3863 to 4766, or a GAIN of 23.4%.
Yep, using 1994 is a great example. Against this pitiful arguement, that is.
Hey Amey, thanks for a good laugh.
11-02-2006 @ 4:03PM
shawnj said...
Yep! Another world is going to hell in a handbasket if the democrats take control. What about the republican platform? If you are a republican you automatically are voting for: 1. Business first and everything of the stock holder, and screw the worker and take away his retirement, pension, and health insurance. 2. Resist paying your fair share of taxes, by establishing offshore accounts and shuttling manufacturing jobs overseas where there are no minimum wages, overtime or unions and reduced labor cost because you do not believe in or support the middle class. 3. Protect the unborn and support the death penalty. 4. Tort reform that guts any settlement plan for the real victims of accident, or crime to get n back on their feet, but produces record profits for Insurance commpanies that no longer have to deal fairly in negotiations for settlement, or can cause of mis-trail if the word insurance company is mentioned in court, even though they are the ones that are forcing their insured to go to court so that they can maintant ehir policy. 5.If you are repulican you deny that there are any enviromental concerns and support a president that would appoint the lawyer of a strip mining company as the head of the enviromental protection agency. 6. You support a world engaging, big stick policy that allows for thmore that half a trillion dollars spent on the military each year while health issues, wages, and education have to scrape for money. 7. Under republicans control prisons are the number one growth industry and you h cab have a piece of it too because it is privatized and you can have stock in the caging your fellow citizens, 78 percent of them for marijuana. But you know that this 78% is the number of people that kep attorneys, judges, police and prisons in business. 8. You believe that there is such a thing as, Trickle down(but not too far down)economics, 9. As a republican you see the next terrorist threat as you saw the old comunist threat and they can't even change the inteligence to support these fear mongering sensationalist McCarthistic claims. 10. The Tax and spend democrats gave this president a balanced budget ...so where did our three trillion dollars go ??? I am reminded of what Hermann Goerring said while awaiting trial in Nuemberg when asked how the NAZIs was able to incite the German people to war again... "we convinced them they were under attack and that the pacifists were lacking in patriotism. Think about it... one in four supports this type of regime and it is not in Iraq, Iran, or North Korea...it is here!!!
11-02-2006 @ 4:47PM
Jim Davis said...
I thank if the gop get back in there it is going to be worse. I have been a Democrat all my life have voted split tickets and got burned everytime and bush has been a disgrace along with his cabinet and hopefully Georgia will be back under Democratic leadership after Tuesday.
Jim Davis
11-02-2006 @ 4:55PM
Paula said...
Seriously, when will the party that has been in power for years take some responsibility instead of relying on scare tactics? Repetition does not equal truth people. The republican Congress and republican President have been working hand in glove for years. Is anyone happy with the results?
11-02-2006 @ 5:24PM
Dave Miller said...
The market will fall if the demoncrats win. They will raise taxes,cut and run for the terrorists-the killings are up in Iraq because the terrorists want the democrats to win!!!!They encourage the enemies by their stupid copmments and by showing propaganda films they get from th terrorists. We will then experience more attacks in the US. If Clinton would not have let Saddam kick out the inspectors we would not be there today!!!! Dave
11-02-2006 @ 5:34PM
Andres Soriano said...
After reading the article and then All the coments, there is only one thing that comens to my mind!!
" Democracy only Gets stronger, if all parties have a Chance" If the AMERICAN PEOPLE vote for the Democrats, Let it be.
Remember Democracy comes from the greek Demo=people
Cracy= Power.....Remember Power to the People
11-02-2006 @ 8:05PM
FRED HAWES said...
WHAT A CHEAP BIAS REPUBLICAN TRICK BY YOUR WRITER TO PUT OUT ANOTHER SCARE TACTIC JUST PRIOR TO AN ELECTION...THIS CHEAPENS YOUR SITE AND YOUR INFORMATION
11-02-2006 @ 8:23PM
Ali Lashgari said...
AOL should be ashamed of posting this trash as a major news story! This is another scare tactic being used by Republicans to diminish voter turnout. Nothing in this article makes the least bit of sense!In 1994, the market fell for 5 days! Oooh I am shaking in my boots! We have been dealing with Republican led Congress and Executive branch for six years and see what economic mess they've got us into! Please, you might make a good boogeyman for little kids, but spare the adults!
11-02-2006 @ 8:49PM
Ron Dahlke said...
No one should argue whether there is "gridlock" in Washington, DC, unless they are sneakily siding with Republicans because they want those huge windfall taxcuts that have turned us into the world's #1 debtor nation," made permanent. Yet they still want their $350 Billion and counting illegal, costly wars and all the death of the innocent, to continue, while we, the little people. will end up paying higher taxes, while the wealthy still have THEIR big taxcuts.
11-02-2006 @ 8:49PM
al wilson said...
BUSH CREATED MORE JOBS IN IRAQ THAN HE EVER DID IN AMERICA 'STAY THE COURSE HE MEANS PAY THE COST IN HUMAN LIVES AND IN BILLIONS OF DOLLARS REBUILDING IRAQ.IF BUSH WOULD LEARN ABOUT WORLD HISTORY HE WOULD HAVE LEARNED THAT ENGLAND WENT INTO IRAQ AND THEY HAVE TO LEAVE TO SEEMS LIKE HISTORY IS GOING TO REPEAT ITSELF
11-03-2006 @ 6:04AM
Martin said...
I think we have a better government when we have a "split" government...meaning another party having the majority of the Senate, House, or Presidency. It forces us to comprmise and a single party can't bulldoze their will on others. I hope the Democrats take the House (not the Senate). And I'm a Republican.
11-02-2006 @ 10:01PM
The Dutchman said...
The hand writting is on the Wall, and in huge letter's.Neither one of our parties does the best they can. However, since Sen.John Kerry made his latest negative remarks about our military, were gonna see a huge number of voters who were ready to stay home, that are gonna vote now. And the Dems won't like it either. Kerry is being turned down one after the other for appearances to back his party's candidates who are up for election, and no amount of loquacious damage repair by the Dems will change things now. truk.
11-02-2006 @ 10:29PM
Frank ODonnell said...
Debt is simply crushing for average taxpayer, little
the Democrats can do or the Repulicans now. We are in for a depression in next 36 months.............interest rates will soar, terrorist war will fester under Democrats, with attacks in USA, markets will drop dramatically, Democrats will usher in a depression. Then, a liquidity trap, negative interest rates follow, no
income to move economy in 08' or 09'. Most investment
moves out of USA, trade barriers (Democrats) just
make it worse (Back To The Future) like the 30's.
GAO says mean household debt in USA is now $ 700K
when accruals for retirement are added, looks like
a currency devaluation is a certainty. A new twist
from the 30's !
11-04-2006 @ 8:14PM
Jana Walchle said...
I have been in real estate almost 30 years as a Realtor. When Democrats control Congress, the market historically goes bad. I was there for the 1980's Jimmy Carter 18% interest rates. The 1990's downturn in California because Bill Clinton closed military bases here.....what will happen in the 2000's?
11-02-2006 @ 10:42PM
Alberto Lopez said...
The best choice for America is to eliminates the IRS, replacing it by a ONE PERCENT National Sales Tax. Did you hear me? It's seems not!
11-02-2006 @ 10:53PM
Dave Armand said...
This is total hogwash. The present administration is absolutely ineffective.
The only thing the Bush administration has accomplished is curbing the population by having some brave Americans die in Iraq and Afghanistan.
Maybe if they had a standardized healthcare system, people would be less anxious to go out and buy something.
One gall bladder surgery and you're out 30,000 dollars. Its a big concern.