The world’s unlikeliest Nobel Peace Prize Candidate. Photo by Mark Wilson/Getty Images.
Anyone else notice how weird the world has become lately? Two weeks ago, 2009’s Nobel Peace Prize laureate threatened to strike Syria after dictator Bashar al-Assad gassed over 1,000 of his own people. But then a quasi-dictator with a thuggish reputation and little regard for the rule of law pled for peace and—improbably—brokered a deal to avoid an international armed conflict. And, for good measure, lectured the American people on the need to be patient with fledgling democracies (while betraying a complete misunderstanding of American history). Strange days indeed! Uncertain times, too—the threat of military action is gone, for now, but in its place is a bizarro world where Vladimir Putin is a shoo-in for the Nobel Peace Prize. What to do?! Call the Japanese ambassador? Get the women and children to the lower shelters? Order a report on everyone who’s seen The Sound of Music more than four times? Just kidding! Reenacting our favorite scene from Airplane II probably isn’t necessary. In fact, for long-term growth investors, there really isn’t a need to do anything different! Diplomacy often brings strange bedfellows, the occasional bizarre plot and even blunders. Yet such happenings don’t fundamentally alter the global economy. They just ratchet up political gridlock, which is bullish for stocks.
Here’s why: In the run-up to the 11th hour deal, both the US and UK administrations lost political capital. In the UK, Prime Minister David Cameron’s motion to approve Syrian intervention fell by 13 votes—a first for a UK government since the Crimean War. That 40 members of Cameron’s own party would rebel to deliver such a crushing, unprecedented defeat speaks volumes. Military action to end the slave trade, liberate Greece from the Ottoman Empire and take out Idi Amin, Saddam Hussein and Muammar Gadhafi—and forays into other conflicts that didn’t threaten British soil—all passed the House of Commons. Syria didn’t, which tells you how little clout Cameron and his deputies have at the moment. And as the opposition Labour party gains in the polls, members of the ruling coalition will take extra care not to roil voters before the 2015 election—the chances of extreme legislation passing are slim to none.
Syria never made it to the US Congress, thanks to Putin’s pacifist intervention. But several members of both parties—and about 90% of the general public—were opposed. Some Democratic lawmakers were already starting to distance themselves from the administration after a summer of scandals (IRS, Associated Press, Benghazi). After last week’s flip-flub, they likely move further away in order to improve their chances in 2014—a contest that already structurally favors Republicans.
Now, none of this really changes the legislative environment—this Congress was already the most feckless in history, and divisions in the UK coalition have forestalled significant legislative change for a while. But when leaders stub their toes this badly, it’s one more reason for lawmakers to sit tight. Gridlock seems all but assured, at least until 2015.
Markets adore gridlock. The fewer laws passing, the lower the likelihood of new measures potentially threatening property rights, interfering with the natural flow of capital, goods and services, or otherwise introducing unintended consequences downstream. This doesn’t mean nothing happens—for example, Congress still can, and likely will, compromise on the debt ceiling. If anything, legislators now have more incentive to do so in order to avoid further alienating voters. Gridlock just means markets needn’t much fear legislation radically altering key economic and market factors—one less risk factor. This gives stocks even more leeway to rise on strong fundamentals.
And those fundamentals don’t change just because of bizarre diplomatic developments. Countries will still trade, banks will still lend, businesses will still invest, manufacturers will still manufacture, builders will still build and shoppers will still shop—just as they did during Iran-Contra in 1987, the Bay of Pigs in 1961 and the CIA’s alleged attempt to off Fidel Castro with an exploding cigar in 1963. Those years saw just fine equity returns. As did 2006, which had the double whammy of George W. Bush giving Angela Merkel an impromptu backrub and making some rather colorful offhand remarks about Hezbollah to Tony Blair. World stocks fell in 1992 while George H.W. Bush was vomiting under the table at a Japanese state dinner, but we doubt causality. Worried about trade with Russia? In the unlikely event barriers go up, considering Russia accounted for about 1% of total US trade last year, the economic impact would be minimal—growth in trade with other countries would likely more than offset the loss.
Think of it this way: If the US and world economies are strong enough to keep growing through years of terrible monetary policy (ahem, quantitative easing), they’re likely plenty strong enough to overcome the latest dose of diplomatic abnormality. Stocks, too! Until something truly big, bad and strong enough to derail corporate profitability materializes, investors can likely breathe easy. Vladimir “Peace Prize” Putin may be able to subdue a tiger, but his foreign politicking and its aftermath just aren’t strong enough to kill this bull market.