- Investor attention has lately been transfixed on the Beltway. The effects of proposed healthcare, energy, and financial regulation are common worries.
- But in recent weeks, it's become apparent just how difficult passing "big" legislation can be—all major proposals are to be tabled until at least after the summer recess, and some undoubtedly longer.
- Stocks prefer the status quo, so this may be something of a relief to investors. The longer new bills are stalled, the more likely they are to be watered down or abandoned altogether.
Summers are a time for vacation, sunny weather, baseball, and barbeques. They go by so fast. But we can't imagine it's been a cheery summer in the Beltway, where political bickering has turned things into a muggy quagmire. That just might be a good thing for stocks.
Cogent investor political analysis ought to be nonpartisan. Praise or criticism of politicians should be predicated on how policies and actions will affect capital markets, not personal ideology. That's tough to achieve, but necessary. Thus, MarketMinder remains nonpartisan—we're equal opportunity political critics. But political outcomes matter for stocks and can't be ignored.
That's rarely been more true than today. Front and center on investors' minds lately has been the specter of new energy, healthcare, and (to a somewhat lesser extent) financial overhauls in the US. Fears of a "radical" agenda "sweeping" through the Beltway pervade. In some sense, that's a legitimate concern because markets prefer the status quo. There are indeed good and bad kinds of legislation (you're not likely to see us balk at a tax cut), but generally any change in the rules of the game create dislocation and require economic adjustment.
Yet, in the last weeks:
- A vote on new healthcare legislation has been pushed back to after the summer recess in the Senate (and maybe longer).
- The energy bill (including emissions caps and cap-and-trade) passed in the House but isn't likely to be settled this year in the Senate—and even then, perhaps only a portion of it will pass muster.
- And Treasury Secretary Geithner is pleading to simply get his financial "overhaul" voted on before year-end.
What happened? These last weeks have been a revelation on the mechanics of US politics. Even with partisan control of the House, the Senate, and the executive branch, it's exceedingly tough to get major legislation passed. Between the two chambers, PACs[i], opinion polls, media hype, committees, and so on, what once looked like a slam dunk agenda suddenly is mired knee-deep in procedure and bickering. It's worth noting that GOP stonewalling hasn't been the key—much of the dissension is stemming from the Democrats' own ranks.
Expedience matters in the Beltway. The longer a bill is delayed, the greater the chances of a hugely watered down result or even outright abandonment. Midterm elections are now just a year and change away, and with approval polls sagging and a bevy of freshmen (read: vulnerable) Democrats up for reelection, they won't want to rile tax-paying constituents with onerous new burdens. Ultimately, politicians are apt to consider their political skins over and above most any bill.
Is it mere coincidence the run-up in stocks over the last couple weeks happened in tandem with all this legislative stalling? Maybe. Again, markets prefer the status quo politically. So it may not be a bridge too far to say all of this functions something like a sigh of relief. But investors are cheering better-than-expected economic data and corporate earnings lately too. All told, a number of positive factors likely contributed to global stocks (not just the US) rallying to new highs since the early March bottom.
Also, "landmark" legislation, in whatever form it may take, won't necessarily have the impact many expect. Recall—other developed regions already have similar healthcare and energy programs in place, and their stock markets performed fine and even outperformed the US over much of this decade.
Anything could happen from here. But so far, it's proving to be a longer summer in the Beltway than many expected.
[i] Political Action Committees