Monday, October 25, 2010

Markets, Economy, Gridlock and Maria Bartiromo

After the market close on Monday, Maria Bartiromo led a panel discussion on the long and short term implications of a GOP victory and divided government for the market and economy.

First up, looking at the long term, she interviews Brian Belski of Oppenheimer Asset Management. Belski pontificates on in-house analysis looking for correlations between parties in power and divided vs. unified government, with economic metrics like GDP, personal income, employment, corporate profits, and stock market performance.

Frankly, I don't understand why anyone would take this kind of analysis any more seriously than the Hemline Index or the Super Bowl Indicator. The flaw is easy to see. The federal government simply does not control the GDP, private employment, corporate profits, or the stock market. So why should there be any expectation that there is something meaningful to be learned by trying to correlate with parties in power? Yes, the government can certainly have an effect, even large effects on the economy and these metrics. Still, looking for a correlation on this one parameter among all the myriad macro-economic factors that determine economic performance is like trying to determine the relative effectiveness of redheads vs blonds emptying the ocean with a pail in the middle of a hurricane. It's just silly.

OTOH, 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.

Short term market effects around the catalyst of an election are a different story. Investor psychology and emotion (whether driven by fear or greed or both) can certainly drive market movement in the short term. As I've noted before, if a preponderance of investors believe that divided government is good for the markets, than it can become a self-fulfilling prophecy. That may be exactly what has been happening to push markets higher in recent weeks.

Maria leads a panel discussion exploring whether this expectation is already baked in the market and how long it might last.

If the GOP fails to take back at least one house of Congress, there are likely to be a lot of fearful and disappointed investors.

Perhaps it is worth considering a hedge position on election day. God knows the GOP has disappointed before.

UPDATED: Fixed spelling and typo mistakes. I cannot seem to fix the embed formatting for the CNBC videos. Oddly, it formats correctly in Chrome, but not in Firefox or Explorer. This is beyond my ken. Added more gratuitous Maria pics to go fishing for a Rule 5 link.

Divided and Balanced.™
Now that is fair.

1 comment:

mw said...

No - I don't know why the CNBC embed formatting is screwed up when other video embeds work fine.