Political gridlock becomes roadblock for stocks
NEW YORK -- Partisan politicians. Divisive politics. Fights about economic policies. Financial markets have been battling political headwinds ever since Republicans won control of the House of Representatives in last year's midterm elections.
Get used to it.
A year from now, the White House and Congress will again be up for grabs. Election Day isn't until Nov. 6, 2012. But Wall Street is already bracing for more turmoil caused by Capitol Hill. And the potential for political risk is already on investors' radar.
"The political backdrop in the United States will be notably toxic for the financial markets next year," says Joe Quinlan, chief market strategist at U.S. Trust.
Political gridlock, normally a good thing for markets as investors figure damaging legislation is unlikely to get passed when power is balanced, has morphed into a roadblock.
Quinlan expects corporations, investors and consumers to "tread cautiously" in the first half of the year due to all the negativity about the nation's economy and finances that will surface during the campaign. The negativity, he warns, could dent confidence and cause stocks to stagnate for most of 2012 before rebounding later in the year when investors get a handle on the likely outcome of the election.
Republicans and Democrats are so far apart on key issues, such as taxes, deficit reduction, job creation, health care and business regulation, that investors fear big decisions that need to be made to fix things won't be made. Republicans blame President Obama and the Democrats for stifling the economy with too many regulations, too much spending and too many growth-choking policy prescriptions, such as raising taxes on businesses and the wealthy. Democrats blame the Republicans for catering to Wall Street and for their unwillingness to compromise.
As a result of this friction, some investors fear nothing will get done in the next 12 months.
"We are in a stalemate," says Nicholas Olesen, a private wealth manager at The Philadelphia Group. "We don't think anything will pass until after the election."
The ongoing stalemate is a cause for concern. The grim memories of the big hit to confidence in the USA that occurred this summer during the nasty debt-ceiling fight are still fresh in the minds of Americans. That inability to compromise ended badly. In early August, major rating agency Standard & Poor's, citing politicians' inability to work together, downgraded the nation's triple-A credit rating, causing stocks to plummet.
Meeting of minds
The next test to see if lawmakers can work together comes on Nov. 23. That's the deadline for the Congressional "supercommittee" to come up with a plan to trim the nation's deficit by $1.2 trillion to $1.5 trillion in the next decade. Democrats have been pushing for spending cuts and tax increases. But the GOP is balking at any tax increases, arguing that they would harm an already fragile economy.
"That's the first speed bump," says Andy Busch, a public policy strategist at BMO Capital. "It is extraordinarily important. If it doesn't happen now, it will never happen."
In the upcoming election, Busch says, investors will be looking to elect lawmakers who view the economy through the prism of a corporate CEO.
