2013: Prepare for Gridlock

"Stocks love gridlock." So declares Forbes magazine in a recent column, highlighting the fact that when politicians in Washington are too busy campaigning for reelection to pass any laws... stocks tend to prosper.

And true to form, this election year, U.S. stocks have done just that. Even in a year dogged by sovereign defaults, and threats so to do, anemic job growth in the U.S., and turmoil in the oil-rich Middle East, the Dow Jones Industrial Average had clocked a 10% gain before hitting its recent turbulence, and had come within just a few hundred points of its all-time high. Even after falling back a bit, stocks sit comfortably higher than at the beginning of 2012. But what about 2013?

Gridlock forever
While Forbes holds out high hopes for Republicans gaining seats in the Senate, and whittling away at the Democratic majority there, Barron's magazine counters that, regardless of whether it's Mitt Romney or Barack Obama who wins the White House, "the 113th Congress [will remain] divided along the lines of the 112th, with Republicans controlling the House and Democrats controlling the Senate."

No return to the 2009 filibuster-proof Democratic supermajority is in the cards. Democrats aren't likely to retake the House, either. Nor will Republican gains in the Senate (if they gain at all) be great enough to give a newly elected Romney his own filibuster-proof majority.

So basically, we're headed for at least two more years of gridlock.

Good news?
According to an infographic recently prepared by Fisher Investments, when a Democrat is reelected, the S&P 500 returns 14.5% in the first year of his second term. Returns for a newly elected, first-term Republican president are even better -- 18.8% on average. When you combine these numbers with the historical benefits of gridlock (for stock prices, at least), investors may have a lot to look forward to in 2013.

The possibilities are rich enough to make an investor drool. A gridlocked Congress, unable to pass sweeping cuts in defense spending, alongside a president who's either gone on record saying sequestration "will not happen," or one who actually wants to increase defense spending? That could be great news for defense contractors like Boeing (NYSE: BA  ) and Lockheed Martin (NYSE: LMT  ) .

On the health care front, the path to Obamacare has already been mapped out well into 2014 at least. That could give insurers like UnitedHealth (NYSE: UNH  ) and WellPoint (NYSE: WLP  ) a couple years' breathing room to figure out how to make a profit under the new insurance regime -- barring the threat of new regulation to repeal, tweak, or expand the program.

Similarly, a Congress too busy infighting to think up new ways to siphon profits out of the financial industry, to subpoena CEOs or monkey around with interchange fees, might open a window of opportunity for JPMorgan Chase (NYSE: JPM  ) and Bank of America (NYSE: BAC  ) . Finally, an opportunity to sit down, study the new regulations, and start going after profit wherever it remains to be found.

Reality check
On the other hand, we've been here before, right? After a politically omnipotent President Obama failed for two years to pass the majority of his agenda, despite possessing a House majority and filibuster-proof Senate, Congress devolved into split-party gridlock in 2010. And what happened then? While legislators were unable to pass as many laws as they might have liked, by the same token, they were unable to take needed action to cut spending and reduce the deficit. The result was a financial crisis in which the United States of America very nearly defaulted on its debts.

That debacle didn't do much good for anybody, least of all investors, who in one particularly atrocious quarter (Q3) saw 14% of their portfolios vaporized by Congressional inaction.

Keep hope alive
So... which scenario will play out in 2013? The "historical" pattern of generous gains in stock market value, or the more recent example from history, that we call the "debt ceiling crisis?"

Bernadette Budde, senior VP for political analysis at the Business Industry Political Action Committee, believes legislators have finally come to "an agreement among Republicans and Democrats that the Simpson-Bowles deficit-reduction plan needs to be revisited." She's convinced that shortly after the election, a grand bargain will be reached to reduce the debt and fix the nation's fiscal problems.

Such a bargain will include "tax reform" and a reduction in tax rates -- presumably alongside the closing of loopholes, and hopefully, a return to historically ebullient stock markets, regardless of who's in the White House.

Here's hoping compromise and common sense trump gridlock. Here's hoping she's right.

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  • Report this Comment On November 06, 2012, at 7:17 PM, Alg0rhythm wrote:

    Reduction in NOMINAL tax rates, maybe. But when governments are broke, seldom do taxes go down. Investment loopholes need to be closed.. income is income.. inheirtance taxes, need to go up... eat what you kill, and make your own way goes out the window when you pass on a couple 100 K or more to your children, let alone the wealth of soviet republics like the walton kids.. it's still income to them, and should at least be the normal tax rate. (hmm.. reminds me to hurry the settlement on my own inheritances quick before I have to practice what I preach and ruin my political career)

    I think the debate over whether or not social Security is technically broke or not hilarious... govt has been spending that and not even including it in the debt calcs. payroll tax has to go higher, and there needs to be a sensical investment vehicle for any surpluses, like maybe social security retirement villages.

    Long term to get a good economy... we need to believe in the gospel of climate change... business for everybody and un outsourceable jobs... a crisis hallejueah. Gotta dump tons of money in, get the conversion work done.. millions of jobs, govt insured bonds on building and car retrofits in the trillions of dollars.. or else! catastrophe, that is, actually, probably quite realer than even I like to admit.

    http://www.munichre.com/en/media_relations/press_releases/20...

    The projections I have are quite rosy, and works out well in the long term, because expenditures are offset by the decrease in foreign oil purchases (600 billion a year or 6 trill every 10)

    Positive bubble, averts disaster, economy BOOMS everybody's happy. Which brings us to what makes a President great for the economy... handsome likable fellow, who stays positive, ignores idiots hating, and has amazing vision.

    Long term or short, the only thing that

  • Report this Comment On November 07, 2012, at 6:33 AM, DevilzAdvoqate10 wrote:

    ELECTORAL DICTATORSHIP. well done, America. You voted yourself ever closer to being sukked down the totalitarian, socialist maelstrom.

    Ironic that since McCarthy you waged a psychillojikal war against that other Union of Soviet Socialist Republics. When 2/3 of you can vote to tax, inflate or regulate to death the other third (or whatever, don't go all hair-splitty on me), that model of entrenched, computerized, bureaucratic, police-state is already yours....

    GOAT OF MANY COLORS. ....Yet now is possible an unholy alliance between the ex-KGB Red Devil Rasputin & the Barack Devil. See how he resembles Max Shriek in Murnau's 1922 film Nosferatu: he'll gorje himself on the wealth you create to further entrench his kingdom. In CAPRICORN 1 of 1977, if Tely Savalas' charackter didn't actually say "Politicians are Perverts", he would've:- meaning, government has descended into institutionalized ("legalized") gangsterizm. Even Hitler said ironicly of America, "....that Gangster Nation!" (takes one to know one, darling!).

    6 TRILLION-DOLLARMAN. When $6 000 000 000 000 are siezed annually in every tier of govern-mental protection-raquet, that's half-a-hundred grand a household!!!! Is that where you want your money to go?

    ENTREPRENEURS Vs STATE. Pontiac (1720), Davy Crokket (1786), Johnny Appleseed (1774), James Jerome Hill (1838) & High-Plains Drifter (1973) all rotate in their graves.

    Only thing to save you from yourselves will be (a) Natural Disaster; (b) Secession; (c) Civil War or (d) Friendly Alien with spaceship equip with force-shield to quarantine bureau-fat-cats.

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