As the 2006 midterms loomed, Larry Kudlow was featured in one of the our First YouTube posts. Kudlow speculated about a "Pelosi Bull Market" as investors anticipated a Democratic victory, an end to the four years of Republican One Party Rule, and the restoration of divided government:
final episode of Kudlow's show, divided government was again a topic of conversation, although the tenor was a bit more reticent.
He says that like it's a bad thing. Panelist Bob Costa seems to regret that the Republicans were unable to implement a big conservative agenda due to the restraints imposed by a divided Congress. Of course, for a dividist like your loyal blogger, restraining the worst impulses of both parties is exactly the point and a reason to vote for divided government.Kudlow: "Robert Costa politically, do you see any major policy changes? -- let's start with this year."Costa: "No I don't. I think when you look at what house Republicans are doing they've started to acknowledge a divided government is not going to yield any major conservative gains. So they're mostly playing defense and they're trying to move their message and agenda away from the shutdown politics of the fall. When I interviewed Eric Cantor recently he was talking about the so-called middle-class squeeze. He was talking about jobs but he wasn't really articulating a broad, vigorous growth message. You see some talk about Obamacare. but it's really a small ball agenda. I think they're just trying to play it safe ahead of the midterms. And the Democrats - you guys are right - the President's focused on regulations. He's focused on his pen. He doesn't think he can get anything done with this divided Congress. so I think we're going to see some very incremental political bills the rest of the year."
Although we've frequently tapped the topic "Investors Love Divided Government", we need to come clean.
Full Disclosure: We don't really believe it. Don't get me wrong - we believe that investors believe it - which can lead to self-fulfilling prophecies in short term market moves. However, we don't really think there is any correlation between partisan control of the federal government and market performance that would stand up to a rigorous statistical analysis. As we've said before:
"Over the long or medium term, we do not think any attempt to correlate political parties in power and stock market performance should be taken more seriously than the Hemline Index or the Super Bowl Indicator. The reason is simple. The federal government does not and can not control GDP, private employment, corporate profits, and/or the stock market as much as congress, presidents or presidential wannabes would like us to believe. Studies that look for correlation between parties in power and those things that the federal government does directly control (spending, deficits, legislation, armed conflict, and currency) are interesting and informative. For that we can look to political scientists and economists like Niskanen, Van Doren, Mayhew, and Slivinski for answers. But lasting effects on the stock market based on party in power? No."The fact we don't believe it doesn't mean we won't take advantage of it. In fact, the two most popular posts of all time on this blog both feature CNBC anchors discussing the impact of divided government on the market:
Why are these our two most popular posts of all time? Perhaps we can glean a clue from the top 10 Google searches that find their way to our humble blog...
There appears to be a direct correlation between blog post popularity and and pictures of CNBC anchor cleavage. Do not expect the Dividist to pander to this lowest common denominator (aka Rule 5). Here you can only expect to find serious in-depth analysis exploring the relationship between market expectations, elections, and divided government. For example this article by Ken Fisher:
|Not Ken Fisher|
Maybe yes and maybe no. Bloomberg and at least one Fed Bank President takes a different view, but University of Georgia Economics Professor Jeffrey Dorfman offers academic support for the Ken Fisher thesis:By Fisher Investments Editorial Staff"Midterms. They aren’t just college exams—they’re also methadone for political junkies in between Presidential election years. And with Congressional election rhetoric heating up, many wonder what the contest means for markets. In our view, whether the Republicans or Democrats gain a few seats in either chamber, the likely outcome is (drumroll): Gridlock! Something stocks love...In short, the likely outcome is gridlock—a big positive for markets. Headlines tend to deride gridlock, claiming we need a functional legislature to pass supposedly growth-enhancing legislation. But in an economy with a robust private sector, ample private property protections and overall growth, markets tend not to like legislation much. They’re wary of unintended consequences that stem from even the most well-intended measures. When the chance of passing big, sweeping legislation is slim, legislative risks fall...If you’re waiting for an election all-clear, in our view, it’s a fool’s errand. Markets are forward-looking, and they’re likely already well aware of the election’s probable outcome. Chances are they’ll start digesting the likelihood of gridlock before the votes are tallied."
"In fact, the best government for the economy is a Democratic president and a Republican Congress, which is roughly what we have right now. The next best is a Republican president and Democrat Congress.The important thing for the economy is that government be divided so that it gets little done. Having the two parties restraining and blocking each other helps businesses because the politicians pass fewer laws and thus do less damage to the economy."We report, you decide. With that, we'll wrap this up.
And what better way to finish up and congratulate CNBC on their 25 years of excellence in financial reporting than with Amanda Drury's succinct coverage of market action on the very day of CNBC's 25th Anniversary: