The
recent mid-term elections gave Republicans control of both the House and the
Senate. Many economists and investment
strategists are cheering the Republican takeover since they believe it will mean
positive changes ahead for the U.S. economy.
If history teaches us any lesson, however, they are likely to be
disappointed.
The
last time Republicans swept mid-term elections in similar fashion was in
1994. At that time American voters were
fed up with a rising tide of liberal policies under a two-term Democratic
president and were eager for a change.
Conservative Republicans campaigning under the promise to roll back
taxes and onerous regulatory burdens were pushed into Congress by an angry
electorate. The promises that many
candidates of this “Conservative Revolution” made to their voters were,
however, quickly broken and a business-as-usual attitude was embraced by the
incoming congressmen. They were
unwilling to give a Democrat president the credit for any positive legislative
changes that might have been created, so they did nothing of note.
Fast
forward to today and the parallels are uncanny: a two-term Democrat president
who is viewed by some as ineffectual and a voting public disenchanted with
higher taxes and a gridlocked Congress have once again led a conservative
revolution on Capitol Hill. Promises
abound among the many incoming freshmen congressmen, but the outcome is likely
to be much the same as in 1994. There
simply isn’t enough unanimity among Republicans on key issues to lead to
meaningful changes, and the incentive isn’t there to do anything the President
might get credit for. Therefore a
do-nothing approach is the most likely outcome.
Investors
have no reason to fear this, however, as a do-nothing Congress has been just
what the doctor ordered for the corporate outlook and stock market. With Republicans and Democrats unwilling to
compromise, the financial market recovery has persisted these last six years
with nary a serious setback along the way.
That’s because when Congress is on the same page and making “progress”
it usually results in a higher tax and regulatory burden for businesses and
taxpayers. In other words, we the people
get the screws.
I’m
convinced the reason why the recovery has continued on for as long as it has –
in defiance of the long-term cyclical norm – is partly because Washington
politicians have been unable to derail it through a unified legislative
agenda. The constant partisan bickering
amongst themselves and with the president has led to a lack of agreement on
areas which affect all of us, including taxes, energy policy and small business
regulations. Thankfully, the potential
damage to the economy has been minimized due to Congress’ failure to reach
agreement in these areas.
The
Congressional cycle, which happens to be bullish for stocks, is also a factor
for equities going forward. Economist Ed
Yardeni mentioned this cyclical indicator in a recent blog posting. His statistical consultant, Jim Marsten,
wrote the following:
“Suppose I told you there is
a technical indicator that, once the buy signal was given, has an amazing
record--with the S&P 500 up three months later 17 times out of 18 since
1942, up six months later 18 times out of 18, and up 12 months later 18 times
out of 18. The only condition this technical indicator has to meet is a
particular political-calendar date, i.e., mid-term election day, which happens
to be tomorrow. Buying on that day is one of the best technical strategies I
have ever seen. One has to go back to Depression-era market losses to find two
periods when this indicator did not give consistently positive results. The
historical odds are almost 100% in your favor. The average percentage changes
are also good since 1942: 8.5% for the three-month periods, 15.0% for six
months, and 15.6% for 12 months.”
It’s
no coincidence that one reason why this indicator works is because election
years normally coincide with bottoms in the Kress yearly cycle series. Next year is also the fifth year of the
decade, which historically is one of the most bullish years in the decadal
rhythm for equity prices. The Year Five
Indicator hasn’t had a single miss going back over 100 years. With all the major yearly cycles up next
year, and with the Congressional cycle in its peak phase, the odds greatly
favor a bullish 2015 for stocks.
Since
a gridlocked Congress is the closest we can come to the Jeffersonian ideal of
“That government is best which governs least,” it should be viewed as a blessing
in disguise. As investors and taxpayers,
we can only hope it continues for at least two more years.
