Investors love divided government.
By mw | Related entries in Economy, Elections, Ideas, Money
On the DWUSWF blog I have distilled opinion, analysis and scholarship on the documented benefits of divided federal government, which include restrained growth of spending, better legislation, greater oversight, fewer wars, and overall better governance.
An interesting, less weighty, but potentially profitable additional benefit is: The stock market loves divided government.
Shortly before the 2006 midterms, economist and CNBC commentator Larry Kudlow explained the market surge leading into the 2006 midterms was due to investors lusting after a divided government result. Reporting this fact almost blew the uber-Republican’s head clean off, as you can see in this video. His perspective was reinforced at the time by Rich Miller at Bloomberg and Michael Sivy at CNN Money.
Eight months after the American electorate in their collective wisdom saw fit to install divided government in Washington DC, the investor class seems to be enjoying it more and more, or so says Ken Fisher.
Ken Fisher is an author, investment manager and a columnist in Forbes magazine for over 20 years. Last year he ventured out of the investment sphere to partake in some political prognostication for the 2006 midterms. He correctly invoked a little know historical fact, which I dubbed the “100 Year Rule.” In the 100 years since we have directly elected Senators, the House of Representatives has never switched majority party control unless the Senate does also. Ken originally referenced this rule to support his prediction that Republicans would maintain control of Congress. The rule held true, but Ken was on the wrong side of the outcome, as both Houses of Congress flipped Democratic in 2006. I can tell you that Ken is a much better investment manager than he is a political prognosticator.
In a recent column he makes the investor case for gridlock and divided government in “Thanks for not Legislating”:
“Here’s one more reason to remain bullish in 2007 and into 2008: We’ve got a do-nothing Congress. Stalemated legislators are good for the market. Have you ever seen a more gutless Congress than the one now in session? Well, okay, maybe the last one, the Republican one, was almost as gutless, but it’s all the same bull market. The less that lawmakers can do, the less damage they can do… In years when Congress is active, political risk aversion rises and, as it does, demand for stocks and bonds falls. Political risk aversion and stock demand are inversely correlated.For this year and next anything important that Congress passes, and there will be precious little of it, can be vetoed with impunity by our lame-duck President. What a beautiful world. Celebrate gutlessness! If you haven’t already done so, buy stocks.”
If interested, you can read the rest of this or other columns for his specific stock picks. I’m not going to tell you what to do with your money, but I can report that I have been following Ken Fisher for years and he has always been a profitable read for me. Your mileage may vary. Regardless of your investing proclivity, this divided government sure seems to be fueling a very nice bull market. Since November 2006:
S&P 500 +10.37%
NASDAQ +10.57%.
x-posted at Divided We Stand United We Fall - Divided and Balanced.â„¢ - Now that is fair (and profitable).
This entry was posted on Thursday, June 21st, 2007 and is filed under Economy, Elections, Ideas, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
June 21st, 2007 at 8:41 pm
In business school, the professors made this point again and again. The best thing government can do is nothing because it eliminates a layer of both risk and costs, and allows companies to just focus on delivering value rather than worrying about what the busy government will do next.
Good to see that the economy keeps booming!
June 22nd, 2007 at 1:57 pm
Yeah, it is somewhat counter-intuitive but true: While a single party controlled Republican government may be better for business than a single pary controlled Democratic government, neither is as good as any configuration of divided government (President, Senate, House not all one party).
January 7th, 2008 at 6:06 pm
[...] was reinforced at the time by Rich Miller at Bloomberg and Michael Sivy at CNN Money. In a post from June 2007, eight months after the American electorate in their collective wisdom saw fit to install divided [...]