November 14, 2006 – Last week, in the U.S. Mid-Term elections, the Democrats won a stunning sweep of both houses of Congress, throwing the U.S. government into what many term as “gridlock” for the next two years as a Republican President will fight a Democratic Congress. But what does this sweeping change mean in terms of a market perspective?
I really don’t think too much. Maybe that’s just my skepticism, but I think it’s more a dose of reality. The biggest changes that can affect markets are likely to come through legislative changes,as we saw a Canadian tax law change cause the destruction of Canadian $20 billion of wealth in a matter of hours a couple of weeks ago. So let’s take a closer look at some of these issues.
Let’s start with the U.S. markets in general. People always state the U.S. stock markets will suffer with Democrats in control, but since this current leg-up was partially manufactured, and record highs won’t in reality be achieved until the Dow rises above 14,300, this much-discussed current bull in the U.S. markets is more like a grazing cow. I didn’t think that this charge was sustainable with the Republicans in control and neither do I think it sustainable with the Democrats in control.
Taxes? Yes, taxes in the U.S. will probably rise with the Democrats firmly in control of Congress, but long-term, for the health of the U.S. economy, this is quite necessary. I just read this morning an article that declared that the U.S. trade deficit narrowed at record levels. Again, this is just more political posturing and manipulation by the government.
The overall deficit, the only number that matters, is still ballooning out of control, thanks to a continuing disaster in Iraq, and a growing Medicare and Social Security obligation that is bankrupt, and numerous other enormous obligations that somehow never make it to the bottom line of the official government deficit. So though people hate taxes because taxes cut into their purchasing power, an increase won’t be the fault of the Democrats. It’s a necessary step to address decades of fiscal irresponsibility.
Defense? Again, the consensus is that defense sector stocks will suffer as Democrats are widely viewed as doves while Republicans (or at least the current administration) are generally viewed as hawks. However, the reality is that the military-industry complex is too powerful to be curtailed no matter the desires of either political party, let alone the desires of the President. U.S. President Eisenhower once stated that not a single penny more than absolutely necessary to secure the United States should be spent on defense. Yet, defense spending ballooned out of control under his watch. The defense sector, especially with an Iraq war with no end in sight, will not suffer as much as people believe under the Democrats.
Furthermore, an integral part of the Republican 2004 Presidential campaign’s message was that Democrats were weak and compromising when it comes to the “war on terror” and that Americans were much safer with Republicans leading the country. Democrats will surely want to dispel this notion now that they are in power in Congress if only for the reason to dispell that message and gain some political capital for the 2008 Presidential elections. While certainly Democrats will lead a charge for significant change in the strategy being pursued in Iraq, their desire to re-mold their image as a strong party and one capable of providing security to their nation will translate into a healthy defense budget for many years to come.
As far as a restoration of the Constitutional powers that have been eroded by this current administration, I’m taking a wait and see approach with this as well. Remember that the Patriot Act and other legislation that severely eroded the sovereignty of the Constitution could not have happened without the votes of Democrats as well.
Healthcare? The consensus belief is that big pharma is in trouble and that Democrats will pass stricter industry pricing controls and cut back some of the price gouging that makes the same prescription drugs 35% more expensive within U.S. borders than they are to the neighboring north in Canada or neighboring south in Mexico. Again, I’m going to take a wait and see approach with this as well. Companies in the big pharma sector are among the biggest monetary contributors to both the Republican and Democratic parties. I never underestimate the power of bribes in the form of political contributions to affect legislation in favor of industry advocates. The biggest change we may see here is a more favorable environment for stem cell research and more advances in this arena than in the past.
Finally let’s look at global trade. Democratic Speaker of the House Nancy Pelosi is notorious for her critcism of China’s human rights track record. Yet, when was the last time China has not retained a “Most Favored Nation” trade designation? Can’t remember? Either can I. And that’s my point. Economics always wins over ethics. So I really do not see any change here.
However, Democrats historically have been more protective of American industries. This is where the political shift in power may have some impact. If the U.S. tightens protective legislation for American industries to prevent Chinese imports from eroding domestic business, then this may have an impact on the global economy.
However, to write about how much impact such legislation would have at this point would be purely speculative. If the U.S. buys less of Chinese goods, maybe emerging markets in Russia and India pick up the slack to make the sum effect negligible. So in the end, while there is certain to be some significant shifts in foreign policy, as far as the effect on the global economy, I see no immediate effects, and I’ll take a wait and see approach with the legislative effects.
