When Gridlock Is Good

(AP Photo/Jason DeCrow)
If the Democrats take control of the House and Republicans maintain a majority in the Senate, as many pundits are predicting, one of the big stories following the midterm elections will be the potential for legislative gridlock. And while the stagnation might cause grumbling among many Washington-watchers, at least one group may be just fine with the possibility.

You may already know that, if you've caught any one of the many articles speculating about what the election means for Wall Street. It seems that the market, like a disillusioned Daily Show watcher, is responding to the prospects of a Democratic sweep with a collective shrug. Why? Because what irks many a columnist most – gridlock in Congress – is actually swell news for investors.

Writes Rev Shark for TheStreet.com:
"The general belief on Wall Street is that the Democrats are a negative for the stock market because they tend to favor higher taxes, especially on capital gains, and also because they tend to favor restrictions on big business such as windfall profit taxes on oil companies and price controls on drug companies. There is little doubt many of the Democratic policies are not stock market friendly but does that mean the stock market is going to have a major negative reaction should they win? Probably not."
Why? With a Republican president and Senate and a Democratic House, the big outcome will be gridlock. And according to Shark: "if there is one thing Wall Street loves, it is a less meddlesome government."

Another columnist from TheStreet, Liz Rappaport, agrees, writing that while Congress's two houses may be at odds after the election, it's not going to matter much for Wall Street. "The ensuing rancorous gridlock may make for ugliness in Washington, but its impact on the stock market will likely be superficial."

The Wall Street Journal's Christopher Conkey noted yesterday that "the old 'gridlock is good' maxim" is a theory that "has holes, but it still carries great weight among many economists and investors."

Alexandra Twin at CNNMoney hedged a bit, proposing that gridlock offers a "mixed bag" for investors. But in the long run, a few of her sources argue that such a state of affairs is desirable. One money manager told her "the market actually likes the executive and legislative branches under different leadership as it reduces any damage coming out of Washington." Another agreed: "Gridlock is good," said Ron Kiddoo, chief investment officer at Cozad Asset Management, as it means "negative tax legislation and anything else that's seen as hurting the market won't go through."

So if you get frustrated with Congress playing politics next session, try playing the market instead. You might actually see results.
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