United in Gridlock: A US and UK Political Roundup

Editors’ Note: MarketMinder is politically agnostic, preferring no party nor any politician. We assess political developments for their potential economic and market impact only.

When last we covered politics, we mentioned the US and UK in passing before zeroing in on the Iberian Peninsula. So, perhaps in response, politicians in the two Uniteds decided to dial up the theatrics and give investors more to chew over. Let us take a look.

The shutdown countdown ticks down. Again.

Funny thing about kicking the can down the road: Eventually you reach it and must either kick it again or deal with it. That is the position Congress finds itself in now, with Friday’s deadline to extend government funding and avoid a partial shutdown rapidly approaching. Predictably, they aren’t close. New House Speaker Mike Johnson is trying to bridge the disparate GOP factions by pushing a two-tiered funding bill that would extend some programs to January and others to February in hopes of tackling deeper funding divides piecemeal as those deadlines arrive. House Republicans are divided on the measure, and Senate leadership and the White House have pooh-poohed it. Yet there are some rumblings that the bill may be mild enough to attract moderate Democrats in both chambers and land on the president’s desk anyway.

Look, Congress has always reached a deal at some point, whether at the deadline or a few days or weeks after. But the precise timing and path are anyone’s guess. Maybe Johnson’s plan works. Maybe not. Maybe we get a government shutdown, and pundits are already speculating about the potential economic and market impact. And as usual, it isn’t happy speculation.

So here is a friendly reminder: No shutdown ever caused a recession or bear market. Those occurring during downturns started after said downturns were well underway. Returns may wobble in the run up to a shutdown as uncertainty spikes, but stocks usually bounce quickly. In our view, the associated fears are part of the wall of worry, creating plenty of opportunity for positive surprise to lift stocks.

Manch-out.

It is official: Democratic West Virginia Senator Joe Manchin won’t run for re-election in November. Most attention is focused on the implications for the presidential race, as his Wall Street Journal op-ed announcing his decision strongly hinted at plans to run on the non-partisan No Labels ticket. Our suggestion? Tune all that out. Nearly a year out from Election Day, and with question marks over both parties’ eventual nominees, it is beyond premature to guess at how a theoretical Manchin ticket, Jill Stein and Robert F. Kennedy, Jr. will siphon votes from the main parties and how that might affect the Electoral College tally.

The Senate implications are a little more clear. Given West Virginia has voted for the Republican candidate in every election this century—and by an increasingly wide margin—it seems quite likely that Manchin’s exit means the GOP picks up the seat. This is based on structural factors, of course—candidates and campaigns matter. But West Virginia’s other senator, Shelley Capito, is a Republican, and conventional wisdom says Manchin stayed in office only because he was willing to defy Democratic leadership to champion his constituents’ interests. A more partisan candidate likely stands a much lower chance of winning (absent campaign wildcards).

This puts the Democrats’ majority, to the extent you can even call it a majority since it depends on a vice presidential tiebreak, in question. Democrats already had slightly more seats to defend in GOP-leaning states next year, giving Republicans a structural edge. Now, more seats up for grabs doesn’t necessarily predict a shift, since incumbents can be difficult to beat. But Manchin’s move takes one such incumbent off the table, raising the likelihood of more partisan gridlock if the Democratic Party retains the White House (be it in the form of incumbent President Biden or some other candidate). Yet the Congressional vote also looks close enough that a new Republican president would also face tough gridlock, especially with such deep intraparty divisions likely to persist. Either way, it means Congressional gridlock will probably be a strong counterpoint to whatever big claims pundits make about the presidency next year, be they fearful or cheerful.

Cameron makes a comeback.

Speaking of intraparty divides, UK Prime Minister Rishi Sunak reshuffled his cabinet again Monday, creating a sizable political earthquake in the process. His decision to sack Home Secretary Suella Braverman following her decision to publish an unapproved newspaper column last week took no one by surprise. There is a big debate over whether it was politically wise, given her broad support among the Conservative Party’s grassroots and the need to maximize turnout at the next election (due by January 2025), but the writing was on the wall.

What wasn’t on the Bingo card was the rest of the reshuffle—particularly Foreign Secretary James Cleverly’s move to the Home Office and the appointment of former Prime Minister David Cameron to replace him. Yes, that Cameron—the one who led the Tories for 11 years and served as prime minister for 6 before resigning after 2016’s Brexit vote. He had since left frontline politics and Parliament, opting for a range of private sector positions (which brought him perilously close to a financial scandal, though he wasn’t implicated) and a peaceful country life with his family. But now, with a fresh appointment to the House of Lords, he is back.

And with him comes a huge discussion over what it means. Is it good for the Tories’ electoral prospects? Do voters remember him fondly enough? Tactically, is it on par with Tony Blair’s return to Labour Party strategizing? Or does it signal a more centrist, big-government turn that will further alienate traditional Conservative voters?

The answer to those and all other questions seems like a giant who knows. Commentators arguing both sides of all of them make decent enough points, and the contest is still most likely a year away at least. What does seem clear, however, is that UK gridlock will persist through then, with Cameron’s return therefore extending the status quo. The Conservatives were deeply divided internally before he reclaimed a frontbench seat, and they are deeply divided now. The cabinet may be more cohesive and centrist, but backbenchers have clout and many aren’t happy with government policy. With Labour riding high in the polls, it all creates a big incentive not to rock the boat. So expect a lot of talk and very little action, starting with the fiscal policy package known as the Autumn Statement later this month.

Gridlock annoys people, and we get it. Why pay politicians to bicker endlessly without doing anything? But stocks see it differently. For them, an active government means more risk and more uncertainty, which delays investment as risk-averse businesses wait to see who the winners and losers will be. This negative sentiment can weigh on stocks, though politics are just one market driver. Gridlock is a powerful antidote, zapping that uncertainty and giving businesses the clarity they need to plan, calculate risk and return, and invest. Even if people never consciously see it as a positive, stocks see the reduced legislative risk and rise in relief.

The UK looks set to keep this bullish gridlock through 2024 at least, paralleling the US gridlock that dominates in election years. On the political front at least, tailwinds should remain at stocks’ back throughout the developed world.