Wednesday, October 13, 2010

Investors still love divided government. A lot.

Last July 7, we took note of CNBC's Amanda Drury worrying about double D's and Ron Insana offering an explanation for a stock market rally in the midst of unrelentingly bad economic news.
"All of a sudden there are some reports coming out saying the politicians are underestimating the possibility the Republicans take either one or both house of Congress. If that political uncertainty disappears and you get a Democratic President and a Republican Congress - that is the best combination for stock prices." - Ron Insana
On that day the Dow closed up 276 points at just over 10,000 with the S&P 500 up 30 at 1060. Since then, the Dow and the S&P have each added another 10%+. As I have said before, I do not believe there is any case for a statistical correlation between market direction and political parties in power that will stand up to rigorous mathematical scrutiny over the long term.

However, in the short term, if investors believe that divided government is good for markets, then that expectation can be a self-fulfilling prophecy. That may be what we are seeing now in anticipation of the November results. Apparently the investor class really believes that divided government is good for the market.

On Friday, in the face of yet another bad jobs report, the market rally continued, prompting an interesting segment on the Larry Kudlow Report. A panel consisting of Steve Moore (who worked for Dick Armey in '95); Jeff Matthews (investment manager); and David Goodfriend (who worked for Bill Clinton in '95) discussed whether the market's continuing strength was attributable to an anticipation of the return of Divided Government:

Money quotes:
Why did stocks rally though 11,000 today? on this poor jobs report? Might it be hope for Republican tsunami in November? ... I have this suspicion that the stock market is mightily rooting for a Republican tsunami on November 2nd. - Larry Kudlow
"I am not saying this as a Republican - I just think that the financial markets want to see divided government. One party control has not been good for financial assets and it has not been good for workers. " - Steve Moore
The most interesting exchange is between Goodfriend and Moore (around the 5:30 mark) arguing whether Republicans or Democrats could take credit for the prosperity and relative financial sanity that prevailed during the Clinton/Gingrich divided government. I am happy to give credit to both, and to the benefits that accrue when divided government keeps the worst impulses of both parties at bay.

Lest anyone think that Republican Kudlow is being disingenuous when he asserts that the investor class prefers divided government and is not just flogging self-serving Republican spin - let me reprise one of my first YouTube efforts. This from from four years ago, shortly before the 2006 mid-terms. Here we see the selfsame Kudlow noting a rally and wondering if the markets are anticipating the Democrats taking the majority, restoring divided government, prompting what he called the Pelosi Bull Market:

Is 2010 like 2006? Kudlow thinks so. Intrade is giving the Republicans better odds now than they gave the Democrats in 2006.

We can only hope.

And the Dividist is fully invested.

So far, so good.

Divided and Balanced.™
Now that is fair.

No comments: