Thoughts on Election Eve

With the media giddily anticipating tomorrow's mid-term elections, headlines are dominated by breathless commentaries, wild predictions, and 11th hour campaigning. You'd think all this hype would make stocks skittish with uncertainty.

Instead, markets surged upward today. The MSCI World gained about a percent and the S&P 500 charged ahead 1.1%. Despite media claptrap, the election outcome looks more or less foregone at this point. Any way you slice it, gridlock will rule Congress. As of this afternoon, contracts at www.Tradesports.com predict the chances of the GOP retaining the Senate at nearly 75%, and a +75% chance for the Democrats to win back the House. (For details on why we believe Tradesports and other online markets are useful in tracking political outcomes, see our past commentary: "Have a Market Mentality".) But no matter which way the election goes, there'll be no strong majorities in either chamber coupled with a lame duck President. That's a recipe for stasis. Markets love a do-nothing Congress because doing nothing means the economy can move freely without the prospect of governmental intervention.

We've read a lot from economists boldly predicting which stocks should do well depending on the political party in power. But in a gridlock scenario such forecasts don't make much sense because neither political party can affect change.

The best policy is to tune out the political pundits for this election. But if you just can't get your fill of election news, here are some election-related articles of interest, and also some to ignore.

Political Stories of Interest:

Ignore Democrat Spin; the Bush Economy Is Solid: Kevin Hassett
By Kevin Hassett, Bloomberg.com
We'd also say ignore the Republican spin, too. But we agree the economy's health is an underappreciated fact.
https://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_hassett&sid=a0EVB7nZ44As

Politics Gone Mild for Investors
By Christopher Conkey, Wall Street Journal
The potential for a gridlocked Congress is bullish for stocks.
https://online.wsj.com/article/SB116277957736814144.html?mod=todays_us_money_and_investing

Does This Math Add Up?
By Jay Cost, RealClearPolitics.com
Mid-term elections aren't determined by national sentiment. Individual races at the state and district level are what matter.
https://time-blog.com/real_clear_politics/2006/11/does_this_math_add_up.html

Political Stories to Ignore:

Protectionist Stance Is Gaining Clout
By Greg Hitt, Wall Street Journal
It's still too early to foresee any meaningful legislation for the next Congress. Besides, even if big legislation was brought to the floor, how could either side get enough votes to pass it?
https://online.wsj.com/article/SB116277226395813918.html?mod=todays_us_page_one

A GOP Massacre: A Bloody Tuesday
By Dick Morris & Eileen McGann, NY Post
Sensational headlines such as these mask the fact that we're headed toward gridlock, not a major shift in political power.

What Makes a Stock "Republican"?
By Michelle Leder, Slate.com
While interesting, this study probably has no predictive power over future stock returns.