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Abercrombie, Gap: we are so over you! originally appeared on BloggingStocks on Fri, 01 Dec 2006 06:29:00 EST. Please see our terms for use of feeds.

Everyone is focused on the results of the Fed meeting which will be released Wednesday. My forecast, along with that of most others, is that the Fed will leave rates unchanged. I also believe that Fed language will emphasize a continuing focus on core inflation, leaving open the possibility of a rate increase but nothing more. This will be, in effect, a continuation of the status quo. No news, just more noise.

However, the real action may be where no one seems to be looking -- the polls for the upcoming Congressional election. Everyone in the mainstream media is forecasting a massive defeat for the Republicans, possibly in both houses of Congress similar to what happened to the Democrats in 1994.

Gridlock in history has been considered to be good for the equity markets because it restrains the extremes of both parties. In 1994, the Republican takeover of Congress forced Bill Clinton to the center and began the prosperity of the 1990's. However, this time things may be different.

A massive Democratic majority in the House along with a smaller one in the Senate could create the worst of both worlds. Democrats firmly in control would attempt huge social spending to reward their base and prepare for the 2008 elections. Republicans would respond with spending bills and tax cuts to satisfy their constituencies. Unlike earlier Republican Heads of State, President Bush's focus has been on winning elections instead of balancing the budget. Fiscal responsibility would become a secondary priority for both parties adding to inflationary pressures and possibly causing the Fed to adopt a more hawkish tone.

Much of this depends upon whether the Republican base stays home on Election Day. If it does, the above scenario becomes likely. However, this is by no means certain. Editorials by John Podhoretz and Dick Morris cite data from Pollster Mark Rasmussen that shows that the Republican base may be more scared of the Democratic leadership than disgusted by a Republican Congress. If this is true, Republican losses may be less than anticipated.

A Republican loss of the House while retaining control of the Senate would result in the gridlock scenario favorable for the equity markets. Even if one party gains control of both branches of Congress, it will be by very slim majorities. No one would be able to accomplish much with the extremes of both parties being restrained from fiscal spending to pacify their respective bases. This would allow the slowing economic scenario desired by the Fed to unfold, with no need to raise rates.

As Election Day approaches, it may be the voters who determine what the Fed will do.

The October Surprise: Poll news may be more important than Fed news originally appeared on BloggingStocks on Tue, 24 Oct 2006 15:58:00 EST. Please see our terms for use of feeds.