When it comes to politics, stock market historians generally agree on one theory of how governments and markets interact: Divided government is a positive.
Many of the great bull markets have occurred when one political party controls the White House and another sits in the majority of one or both houses of Congress. The great bull markets of the 1950s, 1980s and 1990s and the 2010 to 2020 eras all support this theory.
But some think this time could be different. That includes Erick Weisman, chief economist and portfolio manager at MFS.
He believes either a Biden victory and a Democratic Congress or a Trump re-election and a GOP senate would create an environment more likely to pass a substantial stimulus bill. And that’s what many think the economy and the markets need as millions of Americans remain out of work and many industries continue to operate at limited capacity.
Divided government following next week's election might not produce this optimal result. “If Biden wins and the Republicans keep control of the Senate, they are likely to give him little,” Weisman says.
Indeed, Senate Majority Leader Mitch McConnell and other Republicans have shown little inclination to “go big” on a stimulus package. However, President Trump has.
If President Trump is re-elected, Weisman reasons that his victory would likel to be accompanied by a Republican Senate. Under these circumstances, Republicans would be inclined to oblige the president at the beginning of a second term, even if they question another supersized spending bill on ideological grounds.
It goes without saying that if there is the blue wave that some are anticipating, House Speaker Nancy Pelosi would be delighted to give a newly elected President Biden almost a blank check in the $3 trillion stimulus area.
These sentiments were echoed Monday morning on CNBC by David Rosenberg of Toronto-based Rosenberg Research. One reason for the market selloff on October 26 were sudden signs, in his view, that Biden might capture the White House but the Republicans would retain the Senate. That would leave America’s economy at the whims of continued gridlock.
Slower for longer may be a popular narrative, but it’s not universally shared. Markets appear to be reasoning that the absence of the pervasive blame game that characterized the great financial crisis in 2008 could lead to a more constructive resolution of the recent recession. Twelve years ago, many Americans were furious at having to bail out Wall Street banks and sympathy for borrowers who acquired a more expensive house than they could afford was scarce. It’s difficult to resent small business owners and their employees who are forced to shut down by government mandate.