The media blitz is on. It's darn near impossible to escape reports of "monumental shifts" in Congressional power and the "changing tides" of the political landscape today. Within the financial community we've seen scores of stories forecasting what the election means for markets, and who the winners and losers might be. We have a few thoughts.
First, Markets aren't particularly exuberant, nor are they particularly nonplussed in their reaction. Today the MSCI World returned -0.15%, the S&P 500 0.2%, and the Nasdaq 0.4%. The basic response has been a benign one—a clear signal the election's result had little surprise power. Much of what we've read lately from forecasters and pundits says political "gridlock is good" for markets. We agree, but we'd also note this contention is pervasive throughout the financial press right now. We find very few economists predicting the stock market's demise as a result of this outcome…meaning the widely expected result is already priced in to stocks. No surprises here.
Second, this was no "monumental shift". The balance of power in Congress is actually closer than it was, and nearly any kind of consolidated power is a dream for both parties at this point. We've said it before: a lame duck President and a very tight Congress equals legislative gridlock. No big swings in power here, and again, no surprises.
Third, it's not at all clear what effect, if any, Democratic House and (possibly) Senate will have on various sectors or the stock market in general. Bush can veto anything that comes across his desk. And with no possibility of a "super majority" to supersede the President's veto, Congress is just as powerless as the President to any affect big changes. So that probably keeps major shifts off the table.
But this isn't to say that no changes at all could take place. The Democrats now control the political agenda through appointing their own members to Congressional committees and can generally decide on what is brought to the floor for vote. This means smaller legislative tidbits (that can have big effects on certain industries and regions) can be clandestinely appended to bigger bills or budgets. This is a common practice with both parties. But it's far too soon to make prognostications on potential winners and losers.
In essence, yesterday's election held virtually no new news at all for markets. And that should in time allow investors to shift their focus from politics to the strong fundamental underpinnings driving the global economy today.