Final score: Republicans take the House, Democrats hold the Senate, Giants win it all!
The 2010 elections are in the books, meaning a one-year hiatus from robo-calls and a projected 90% drop in examples of Godwin's Law. It also means a new dynamic for the economy and your investments. What should you expect?
The standard narrative making the rounds is that gridlock -- a divided Congress and White House, which it's safe to say we now have -- is good for both the economy and the stock market. The reasoning goes like this: A government unable to pass any legislation boosts business confidence because the future becomes clearer. Knowing that nothing is going to get done is better than not knowing what will get done. Thus, the story goes, gridlock boosts the economy.
Don't buy it.
The example most used when cheering the go-for-gridlock argument is the 1990s, when gridlock was so bad that nonessential government services were temporarily shut down while the economy went parabolic.
The problem with this example is confusing correlation with causation. Yes, there was gridlock in the '90s. But the technology boom that lifted the '90s began well before gridlock. And this boom showed no signs of slowing in cases when Washington did manage to get stuff done. Microsoft (Nasdaq: MSFT ) was sued by the government for antitrust in May 1998, yet its stock tripled over the following 18 months. It's crazy to think congressional kumbaya would have made a difference during a time when optimism was so high that federal antitrust lawsuits were discounted as irrelevant. Besides, much of the '90s prosperity was a bubble. I'm always amazed at how nostalgic we get over periods that ended so, so badly.
Also going against the pro-gridlock argument: We're chest-deep in problems that need fixing. Tax reform. Deficit reduction. Trade policy. Entitlement reform. Regardless of how you feel these issues should be solved, it's a given that they need to be solved. The status quo simply isn't viable. Hard to see how gridlock is a plus in that situation. Abraham Lincoln wasn't kidding when he said, "A house divided against itself cannot stand."
On to the stock market. The idea that stocks do better during gridlock is easily dispelled by the findings of S&P strategist Sam Stovall, summarized here by Annie Lowrey of Slate:
Over all years, the S&P rose at a 6.8 percent annual pace. During times of total unity, 67 of the 111 years analyzed, it gained 7.6 percent annual pace. During times of partial gridlock, accounting for 32 years, they gained 6.8 percent. And during the 12 years of a gridlocked Congress, the S&P gained just 2 percent per year
This doesn't mean there are no winners from yesterday's election, however. Two industries in particular gained serious support.
Republicans' official Pledge to America minces no words: "We will repeal the new health care law." This seems highly unrealistic, but there's no doubt about it: Insurance companies like UnitedHealth (NYSE: UNH ) and WellPoint (NYSE: WLP ) have more friends in Washington today than they did yesterday. That gets more interesting when you consider health insurance companies have been some of the cheapest stocks in the market lately.
In August, hedge fund manager David Loeb called WellPoint, "a statistically cheap stock owned by several hedge funds, but which we saw as being overly exposed to unpredictable government regulation." That regulation is still unpredictable, but the odds of success are more favorable to health insurers now than they were yesterday.
My Foolish colleague James Early explains this better than I can:
We just passed a financial reform law that would seem to make everything cut and dry. In fact, it's the opposite. This law punts a lot of the decisions to individual agencies. And given the backdrop of a Republican Congress, a lot of decisions are going to start to favor banks like Citigroup (NYSE: C ) , JPMorgan Chase (NYSE: JPM ) , Goldman Sachs (NYSE: GS ) , and others.
I wouldn't consider this a reason to buy banks if you weren't already interested in them yesterday. But as with health insurers, banks have more friends now than they did before.
What are your thoughts on how yesterday's elections will affect your money? Sound off in the comments section below.