Opinion |

In Wall Street’s Alternate Reality, Political Gridlock Is Good

Who would have imagined that a split U.S. election would be cause for cheer? Yet stocks rallied on Wednesday

David Rosenberg
David Rosenberg
Wall Street affects financial markets the world wide: South Korea
Wall Street affects financial markets the world wide: Tracking South Korea's KOSPI indexCredit: Lee Jin-man/AP
David Rosenberg
David Rosenberg

The old adage that if you want a friend in Washington, get a dog, can be applied to Wall Street with a twist: If you want to find someone with a social conscience, go somewhere else. Yes, there are a handful of ethical investment funds and as individuals, people in the financial world may give money to good causes and help old ladies cross the street if they’re not late for a meeting. But as an institution, the markets are driven by simple greed (buy) and fear (sell).

So, when stocks rallied on Wednesday – not just in the United States but even in Israel and elsewhere around the world – it wasn’t in recognition that Joe Biden was apparently on his way to an election victory. No one was celebrating the end of four years of Trumpian lies, divisiveness and corruption. Nor was the market encouraged by the fact that the U.S. Election Day came and went without the widely feared disruptions.

No, the stock market of all things was celebrating the prospect of gridlock in Washington. As of writing the Democrats were set to retain control of the House and the Republicans had secured the Senate majority. As to the White House, who cares? The government is already split and in this hyper-partisan era, no matter which party controls the presidency – it won’t be able to work with a legislature controlled by the other party.

To any ordinary person, the idea that Congress and the White House will be unable to work together in the midst of a severe economic downturn and health crisis is frightening. The standoff in recent weeks over a badly needed second stimulus package was Exhibit A for the cost of gridlock.

Until the election returns started coming in, Wall Street had taken the same view. But the stock market’s cynicism has evidently reached new heights: Long-term self-interest has given way to short-term self-interest.

So, as it became evident overnight Tuesday that there wouldn’t be a Democratic sweep, Wall Street quickly recast the storyline to make what Gordon Gekko would have said, if he were around: “Gridlock is good.”

“The market likes the fact that we have a gridlock,” Gary Bradshaw, senior vice president at Hodges Capital Management in Dallas, told Reuters. “We are not likely to see big tax increases, and not a lot of regulation.”

Taxes are low and profits are fat

From a cynical perspective, Wall Street’s thinking makes sense. The S&P 500 index rose a stunning 60% to record highs during the Trump years. But anyone taking a longer-term view has to wonder why this happened. Until the pandemic struck, the U.S. economy was doing well, but the stock market was doing much, much better and all out of proportion to the economic fundamentals. All that, of course, became history when COVID-19 arrived, but Wall Street barely looked back and stocks kept climbing and climbing.

This could happen because Wall Street these days lives in another reality. In the real America, the economy is shrinking, the coronavirus is out of control, the country is contending with deep political divisions and a dysfunctional government. In Wall Street’s America, taxes are low, interest rates are even lower and corporate profits are fat, even in the face of a coronavirus recession. It’s party time.

The Democrats’ economic agenda is not “highly progressive” (in the words of one broker) nor has Biden “handed control to the socialists and Marxists and left-wing extremists” (in the typically measured words of Donald Trump). I doubt many on Wall Street really believe the Democrats are going to turn America into a people’s republic. But what many do fear is that they could prick the bubble Wall Street has been living in for so many years.

Screen showing Biden at the Bombay Stock Exchange, Mumbai, India, Nov. 3, 2020Credit: Rafiq Maqbool/AP

The Trump tax cuts fattened corporate profits, helping to fuel further rises in share prices. But they didn’t lead to an increase in corporate investment as they were supposed to. There’s every good reason to roll them back and bring some sanity to U.S. fiscal policy. Trump’s rollback of environmental regulations also gave a lift to profits, but that kind of thinking is stuck in the 20th century; in 2020, encouraging green business is actually a long-term positive for the economy.

No one needs to be told, except die-hard libertarians, that Trump’s hands-off coronavirus policy has taken a needless high toll on the U.S. economy. If corporate profits haven’t felt the full impact, they certainly will over the long run. Even a crackdown on big tech and health care reforms have as many business positives as they do negatives, if Wall Street troubled to look past the next quarter if earnings.

Wall Street wouldn’t be fulfilling its role if it tried to be good. Its job is to keep the corporate world on its toes by issuing constant report cards on its performance through share prices.

But that only works if the market is making sound judgments that see the bigger picture. It’s post-Election Day performance shows that the only picture it has is how to keep the Trump party going as long as it can, even if there’s nothing really to celebrate.

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