Ignore Election “Momentum”; Gridlock Is Already the Big Winner

It's a truism that investors' memories are short. We forget too easily. Myopia and shoddy memory are parts of what keep markets less than perfectly rational. But this also is perfectly human-generations come and go, experiences and perceptions vary, not everyone is a historian nor statistician.

I recall distinctly two years ago the general media feeling the GOP had "momentum" in the last few weeks leading up to the election, and Romney would ride this tide to victory. Here are some quotes from a Wall Street Journal editorial dated November 5, 2012 :

Romney's crowds are building-28,000 in Morrisville, Pa., last night; 30,000 in West Chester, Ohio, Friday. It isn't only a triumph of advance planning: People came, they got through security and waited for hours in the cold. His rallies look like rallies now, not enactments. In some new way he's caught his stride. He looks happy and grateful. His closing speech has been positive, future-looking, sweetly patriotic. His closing ads are sharp-the one about what's going on at the rallies is moving.

There is no denying the Republicans have the passion now, the enthusiasm. The Democrats do not. Independents are breaking for Romney. And there's the thing about the yard signs. In Florida a few weeks ago I saw Romney signs, not Obama ones. From Ohio I hear the same. From tony Northwest Washington, D.C., I hear the same.

The sentiment behind such thinking is endearing. At its core this is what politics "ought" to be about: patriotism, enthusiasm for the public good and spirited discourse. If the practice of politics is about what "ought" to be, then we tend to see the hearts of true believers swell as the decisive moment of democracy approaches.

But as investors you've got to ignore it-wholly, and from both sides of the aisle. Stocks surged since the last gridlocked-resulted election, and likely will this time too.

This year has a handful of very tight regional elections in the Senate. Any of them could go either way and are far more independent of each other than they are linked; this notion of a national tide of sentiment is always overstated. Elections are run at the regional, ground level for the most part, and this is particularly true of midterms. Statistically, summing the current probabilities, the GOP is a (very mild) favorite to take the Senate, but it won't be at all surprising if any of these elections go the other way. The basic facts of this election show still huge uncertainty and the lack of "momentum's" importance.

What is truly certain at this point is how strongly gridlock will prevail. With a Democratic president, and two chambers of Congress potentially GOP held-but by nothing like super majorities (especially in the Senate)-you have more of the same grinding in Congress, regardless of the final tally.

Folks lament this. Gridlock feels so wrong, so non-productive. The feeling of "getting something done" is always preferable. Whatever your ideology and social preferences, put those aside for a moment and think only as an investor. Particularly for developed, democratic and otherwise capitalist countries (the US being the prime example), gridlock is great for stocks and pretty much always has been. This is particularly true for calendar-year fourth quarters, once the election is over. MarketMinder has detailed this phenomenon consistently (click here, and here for details.)

Why? It's also a general truism that what's counterintuitive to investors (on a sentiment basis anyhow), is often right. What do you have with a "get it done", proactive Congress? You have more rules, more regulations, more changes to the playing field. Economies-that is, the corporations and real people who make the world go-don't like seeing the rules of the game changed. All it does is create winners and losers, zero sum games. It forces adjustments, where that effort could otherwise be employed more productively.

What's in a gridlocked Congress? They scream at each other and not a lot else. That is, the rules of the game don't change much, allowing corporations and people of the economy to otherwise go about their business without the deadweight losses and adjustments of constant rule changes.

These days, we lament low business confidence, uncertainty about the future. Such things promote short-term thinking in both investors and CEOs. What we have ahead of us is a lame duck with a very tightly held Congress, possibly in the opposition. This is an environment where folks will worry less about big rule changes, giving CEOs gumption to invest capital, and letting investors drive the bull market higher.

Momentum in the waning days of the election cycle is a non-issue for the stock market, and it'll be impossible to see that if your ideological bent bends you either way.

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