Back in January, when CNBC host Jim Cramer talked up the chances of "a gigantic rally" should Scott Brown win the Massachusetts Senate race, IBD's Capital Hill poured some cold water on the idea with a post that, in retrospect, seems pretty much on target:
The accuracy of Cramer's prediction may depend on whether investors are more concerned about the looming impact of higher taxes and stiffer regulation than they are about how the economy would fare in the near term with less government support.
While some industries may celebrate a weakened presidency, a political earthquake on Tuesday could raise uncertainty about the macro-economy.
Already, some Senate Democrats are raising doubt that the administration will get the extra stimulus Obama is advocating.
A Brown win would be perceived as lowering the odds for substantial new stimulus and increasing the chances that stimulus will begin to wane in the second half of 2010 and turn into a drag on the economy next year.
Although the market initially sagged after Brown's victory, it did eventually climb to new post-recovery heights "” despite the passage of the trillion-dollar ObamaCare, which the loss of the Democrats' filibuster-proof majority had seemingly threatened to derail.
That timing suggests the market was driven less by Cramer's expectation of "a more pro-business, less pro-labor government" than by now-dimming hopes for a robust recovery.
While fiscal turmoil in the euro zone has played a role, the market peak in late April came just after fiscal stimulus maxed out with an estimated $30 billion in extra refundable credits awarded during tax filing season to those without tax liability. Now, with stimulus threatening to turn into a more noticeable economic drag as political infighting holds up jobless benefits and more state aid, the market has sold off amid clearer evidence of slower growth ahead.
That's not to say another shot of stimulus is the key to economic salvation. At best, stimulus can only buy time. Incoming economic data suggest the 2009 stimulus wasn't big enough or forceful enough to buy a great deal of time, and the time that it did buy hasn't been spent in clearing away hurdles to recovery. Among those hurdles are an uncompetitive tax code and energy and health care cost pressures, all of which helped produce stagnant real wage growth in the last expansion.
Spiraling federal debt, no concern last cycle, presents yet another recovery obstacle because it produces uncertainty regarding taxes and the macro-economy. Here, one might suppose, is where a Congress with more Republican members might help by getting a handle on federal spending growth.
But Capital Hill explained in January why that might not be the case: "The truth is that there's no partisan path to limiting the size of government. Without consensus, entitlements will continue to grow on automatic pilot for the foreseeable future and the Bush tax cuts for upper earners will expire on schedule."
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