How The Midterm Election Could Affect Business

Posted on Thursday, November 4, 2010

Depending on whom you ask, tonight's election will or will not affect the stock market. And depending on whom you ask, it will or will not help business.
The consensus seems to be that it will dampen, rather than boost, markets. But some think that even if markets don't perform well, the anticipated political gridlock will help business avoid stringent regulations.
The conventional wisdom, according to AP and Reuters, is that a lawmaking stalemate -- with Republicans controlling at least one house of Congress and a Democrat in the White House -- would stall most business-related laws and thereby give big business the breathing room it needs to thrive. But even those news wires acknowledge that things might not turn out so simply.
A blog post on Reuters digs up some data from Standard & Poor's to show that in one very specific (but right now seemingly likely) case, in which Congress is split and the president is a Democrat, the S&P 500 falls, on average, 3.7 percent. This phenomenon has held "for more than 110 years," Reuters says.
But the Financial Times is quick to point out the flaws in that data. This particular type of gridlock has only happened on two previous occasions -- "not exactly a hefty sample size."
And Reuters acknowledges that other factors, like the fact that the president will be entering his third year, have historically driven markets up.
Slate's Annie Lowrey uses the same data as Reuters, and although she acknowledges the potential long-term difficulties that could arise from a gridlock, she expects a market rally in the short-term. But not because of any particular outcome. "One thing is certain: Markets love midterm elections," Lowrey says. No matter what happens, she believes, the resultant certainty will yield a pleasant, if temporary, boost.
But over at the New York Times, Heidi Moore is less optimistic. She focuses on Wall Street, rather than the stock market, and says the financial sector has become disengaged from politics. No matter what happens, she says, Wall Street will lose. She makes the state of the Washington-Wall Street union seem pretty pathetic: "There's little personal contact between the two camps; Wall Street generally throws a lot of money into politics, but it does so impersonally, through industry groups or political action committees. Few bankers -- even the most important ones -- bother to spend quality time with politicians to explain issues."
Nelson D. Schwartz, Moore's colleague at the NYT, takes almost the exact opposite view (hat tip to the Big Picture). Washington loves Wall Street, he says: "The most powerful executives in the banking industry didn't go to the government. The government came to them." Daring to adhere to conventional wisdom, Schwartz says gridlock and a Republican-controlled House will help the financial sector, since financial regulation will be stalled, and it will be more difficult for the government to investigate shady practices.
Over at the Big Picture, Barry Ritholtz thinks a newly Republican Congress will actually try to repeal some of the financial regulation.
And at Business Insider, James Cooper of the Fiscal Times, expects a big fat nothing. "The economy's problems run deep, and policy options are limited," he writes. "The problem is demand."
William Alden

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