Voters called for change in Tuesday’s nationwide elections, but the financial world isn’t expecting much of it.
“The political gridlock may look different, but it will likely remain,” concluded a note to investors penned by John Silvia, chief economist for Wells Fargo Securities in Charlotte, North Carolina.
The reason for Silvia’s low expectations are President Barack Obama’s veto powers and the fact that the Republicans did not win a super majority in the Senate to overcome procedural hurdles that make it likely Democrats can block many initiatives from advancing in the upper chamber.
President Obama and presumptive Senate Majority Leader Mitch McConnell on Wednesday pledged to try and work together, and the first test will be around Dec. 11, when a continuing resolution to fund the government runs out and in a lame-duck session the Democrat-led Senate and Republican-led House of Representatives must agree on spending for the rest of the fiscal year, which began on Oct. 1.
What gets worked out in December will say much about the next showdown, sometime around early springtime, involving the need to again raise the debt ceiling.
“This showdown will begin early next spring and could have implications for financial markets,” the respected economist wrote Wednesday. “It is currently too early to determine the exact date when we will reach the debt limit but right now the window to hit the borrowing limit is between March and June. The exact date will be determined by the structure of the funding bill and tax collections.”
McConnell said Wednesday he does not expect the Republicans to shut down the government again as they did in early 2013, and the last time the federal government hit its debt ceiling lawmakers raised borrowing limits without drama. But by next spring, the 2016 presidential race may be under way in earnest and both parties may be jockeying for position.
A similar showdown in the summer of 2011 led Standard & Poor’s, for the first time ever, to downgrade the gold-plated AAA creditworthiness rating given to U.S. government bonds.
Steven Ricchiuto, chief economist, for Mizuho Securities USA, is another Wall Street analyst skeptical of any real changes.
“No matter how appealing this turn of events sounds, it ignores the political reality that the Democrats have little incentive to allow the Republicans look as if they lead in a bipartisan fashion,” Rocchiuto wrote in an investment note Thursday, adding that internal GOP division is likely to surface. “As such, we expect little net progress on the issues that most influence the financial markets.”
Ricchiuto urged that Republicans seek a fundamental change in capital gains taxes_ taxes on profits_ to alter incentives.
“The biggest single problem facing the domestic economy is the focus on short-term earnings,” he said, lamenting excessive focus on short-term returns. “If capital gains were re-written so that anything less than five years would be ordinary income while anything longer than five years would be tax free, the economic needle would move in a big way toward needed structural reforms in the economy.”
One area in which Wall Street does expect positive change is the stock market itself. Veteran market analyst Ed Yardeni noted in a research note that since 1942, following mid-term elections, the S&P 500 rose on average by 8.5 percent for the next three-month period, 15.0 percent over six months and 15.6 percent for 12 months.
“There was only one out of the 45 periods that was down, and just for three months!” Yardeni wrote Thursday, adding that in since 1951, the third year of presidential terms have delivered average gains of 17.1 percent.