Among the many risks that US equity markets are brushing aside is the outcome of the impending Congressional elections, says Alan Abelson in Barron’s. “Even the growing likelihood that the Democrats will take control of one, conceivably even both, houses of Congress and be in an excellent position to commit all manner of mischief evokes, at most, a so-what from the average man in the Street.”
That’s because “it is widely believed on Wall Street that stocks are likely to do better when at least one house of Congress is held by a party different from that of the President”, says Michael Sivy on CNNMoney.com. The reasoning is that a united government will spend more, run larger deficits, create more inflation and generally throw its weight around. Thus gridlock is thought better for the economy and for markets. And one new study has found that this theory is at least half true. Bonds have certainly performed better during gridlock, although for shares the story is mixed. Small and mid-cap stocks have generally underperformed, but “shares of the largest and most dominant companies did benefit materially”.
Is this gridlock theory relevant to non-US markets? asks John Authers in the FT. Direct comparisons are tricky, but the answer is a tentative yes. Mexico has had gridlock since 1997, during which time the market has risen 392%. Conversely, consider China, where the government’s power is untrammelled. Here, stocks have underperformed the S&P 500 over the last decade, despite the economy’s vastly superior growth. “Outside the US, it looks like more gridlock would indeed be good.”