Thursday, June 21, 2007

Investors still love divided government.

This blog has distilled opinion, analysis and scholarship on the documented benefits of divided federal government, which include restrained growth of spending, better legislation, greater oversight, fewer wars, and overall better governance.

An interesting, less weighty, but potentially profitable additional benefit: The stock market loves divided government.

Shortly before the 2006 midterms, CNBC economist and commentator Larry Kudlow explained the market surge leading into the 2006 midterms was due to investors lusting after a divided government result. Reporting this fact almost blew the uber-Republican's head clean off, as you can see in this video. His perspective was reinforced at the time by Rich Miller at Bloomberg and Michael Sivy at CNN Money.

Eight months after the American electorate in their collective wisdom saw fit to install divided government in Washington DC, the investor class seems to be enjoying it more and more. So says Ken Fisher, author, investment manager and a columnist in Forbes magazine for over 20 years.

Ken has been cited here before, when he ventured out of his investment sphere to partake in some political prognostication for the 2006 midterms. He correctly invoked a little know historical fact, which we dubbed the "100 Year Rule." In the 100 years since we have directly elected Senators, the House of Representatives has never switch majority party control unless the Senate does also. He originally referenced this rule to support his prediction that Republicans would maintain control of Congress. While the rule held true, Ken bet on the wrong side of the outcome, as both houses of Congress flipped Democratic in 2006. I can tell you that Ken is a much better investment manager than he is a political prognosticator.

In a recent column he makes the investor case for gridlock and divided government in "Thanks for not Legislating":
"Here's one more reason to remain bullish in 2007 and into 2008: We've got a do-nothing Congress. Stalemated legislators are good for the market. Have you ever seen a more gutless Congress than the one now in session? Well, okay, maybe the last one, the Republican one, was almost as gutless, but it's all the same bull market. The less that lawmakers can do, the less damage they can do... In years when Congress is active, political risk aversion rises and, as it does, demand for stocks and bonds falls. Political risk aversion and stock demand are inversely correlated.For this year and next anything important that Congress passes, and there will be precious little of it, can be vetoed with impunity by our lame-duck President. What a beautiful world. Celebrate gutlessness! If you haven't already done so, buy stocks."
If interested, you can read the rest of this or other Ken Fisher columns for his specific stock picks. I'm not going to tell you what to do with your money, but I can report that I have been following Ken Fisher for years and he has almost always been a profitable read for me. Your mileage may vary. Regardless whether you want to invest in it, this divided government sure seems to be fueling a very nice bull market. Since November 2006:

DOW +11.0%
S&P 500 +10.37%
NASDAQ +10.57%

This may be counter-intuitive but is certainly true: While a single party controlled Republican government is better for business than a single pary controlled Democratic government, neither is as good for business as any configuration of divided government (President, Senate, House not all one party).

Divided and Balanced.™ Now that is fair.
(and profitable)

UPDATED: 6/22/07 to correct typos and replace accidently deleted sentence.

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