Before you read this, it’s important that you think about something very basic: What’s good for the economy in the long-term may not be good for stocks in the short-term, and vice versa. For example, you might think it’s bad for the economy in the long term for the Fed to keep expanding its balance sheet, but the stock market usually gets a short-term lift. OK, with that in mind...
It used to be believed that markets loved gridlock, and there’s no doubt that many in the business community are very eager to see a big GOP win come November. The Republican party’s anti-deficit message is clearly a real-winner right now.
And long-term, there’s a very good case to be made that shrinking the size of government, and returning more of the economy to the private sector is going to be great for the health of the country.
However in the short-term, this is clearly going to cause pain. The US isn’t going to adopt radical austerity anytime soon, but without ongoing aid to the states, it’s likely that they’ll keep shedding workers, and without relief for homeowners, the long, slow deleveraging process is going to continue, crimping consumer spending.
That’s just reality. Again, all of this may be good for the long-term, but it’s not short-term good.
If you don’t believe that this gridlock will hit the market, all you have to do is look at Europe, where gridlock is the result of differing national interests, rather than partisan interests. But the effect is similar, and everytime it looks like a country may be forced into a painful restructuring, markets fall.
That is to say, when Greece or Ireland looks set to topple, nobody thinks: Gee, this is great that this necessary restructuring is happening, I’m going to buy stocks!
Instead they think: PANIC! SELL!
So if you’re an investor, you should really be thinking about this seriously, especially with the GOP talking about shutting down the government. Maybe it won’t be an issue at all, but at least think it through.