President Obama and Congressional leaders enjoy a friendly post-midterm lunch. Photo by Dennis Brack/Pool via Bloomberg.
Editors’ Note: Our discussion of politics and elections is purely focused on potential market impact. Stocks favor neither party. Believing in the market/economic superiority of one group of politicians over another can invite bias—a source of significant investment errors.
“What can we expect from the next Congress?” Over a week after midterms, speculation still hogs headlines. The latest: Some say this year’s lame duck session is the acid test. If the long-bickering, do-nothing, 113th Congress can shake hands and pass a raft of measures, we’ll know the 114th can break the ice, too. And if not? Don’t expect bipartisan compromise the next two years. But this overlooks what Congress usually does during the two-month purgatory between the election and when the guard changes in January. We believe investors should expect a typical lame-duck session, which doesn’t really indicate much of anything about what follows.
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During campaign season, politicians often make mountains out of molehills, taking legislation overwhelmingly likely to pass and charging up the debate with rhetoric they don’t actually believe. (Yep. We know. You are shocked politicians may not be 100% truthful.) These typically aren’t contentious issues or grand bargains, like a balanced budget or tax reform. They’re small things each party seizes on, says create a difference, uses to poke the opposition and curry favor among their base, road blocking passage until the election is over—wedge issues. The lame duck session following voting somehow manages to overcome these “sharp divides,” usually pretty uneventfully, no less. In 2012, this was The Fiscal Cliff. The Bush Tax Cuts played this role in 2008, 2010 (and were part of the Fiscal Cliff in 2012). Before the 2012 “permanent” patch (we’re skeptical anything involving politicians is permanent in reality), the alternative minimum tax patch was also a biannual false fight. The Dairy Cliff has been this very issue many times as well, too. When the election passed, the Fiscal Cliff became the Fungible Cliff, but in fact was the Great Wedge Issue of 2012 all along.
This time appears no different. The agenda is stacked with measures on ice during campaign season—largely low-hanging fruit. Among the most likely are extenders—tax breaks regularly renewed each year in Congress, often retroactively. This year, there are roughly 50 extenders that expired at the end of 2013 which await renewal. These are the tax breaks individual politicians use to win support at home: Aid for renewable energy, horse farms, NASCAR tracks, Puerto Rican Rum[i] and more. A notable one, the R&D tax credit, has been much debated, itself labeled a cliff earlier this year. Another issue: Funding the fight against ISIS, which the President has requested $5.6 billion more in financing to do. Ultimately, these are the kinds of things that typically will pass even a gridlocked Congress when in a lame duck session.
Should these bills pass, we would caution against thinking this is a sea change and gridlock is giving way to cooperation and Kumbaya. The passage of laws that were almost certain to pass after the election isn’t sign of getting along, it’s a sign the curtain is closed on the political theatre that was the 2014 midterm elections. One contentious issue is perhaps moving forward—namely the Keystone XL pipeline, but largely because both parties believe passing is key to boosting their candidates’ chances in the Louisiana Senate runoff. It’s the exception that proves the rule, and there is no guarantee it doesn’t just sit unsigned and die a quiet death in this January’s transition. And with that curtain closing, a new cast of characters arrives. There are going to be a significant number of new faces in the next Congress. 58 people either retired or lost their seats in the House elections. 12 in the Senate. The last Congress was the most do-nothing in history, and it isn’t all that likely we see a big switch now—after all, control shifted to the Republicans in the Senate, and they increased their House majority while legislating little. If it ain’t broke, why fix it?
In our view, it’s most likely the next two years are characterized by more legislative nothingness. After all, they do not have the power to override an Obama veto, which seems all but assured to be used more frequently than it has the past six years. But before you bemoan more inaction, consider: Gridlock is good for stocks. A gridlocked Congress means there is little chance of sweeping legislation markets don’t like passing.
Stock Market Outlook
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[i] We are in favor of Puerto Rican Rum. And other rums!