Markets & Stocks
Gov't gridlock meets Street
December 13, 2000: 3:36 p.m. ET

Election essentially decided, markets look somewhat optimistically at gridlock
by Staff Writer Franklin Paul
graphic graphic
NEW YORK (CNNfn) - Goodbye presidential election. Hello gridlock!

That's what some Wall Street players, with just a hint of glee, have indicated this week as the nation finally tunes out the muddied, drawn out election process and the resulting uncertainty that has roiled the stock and bond markets since Election Day, Nov. 7.

Welcome, they say, to what could be at least two years where a partisan, divided Congress fresh from this bitter debacle -- could make difficult any attempts by George W. Bush, most likely the next U.S. President, to push through major legislation.

That's called gridlock government's powerlessness to affect significant changes in policy because there is no clear voting majority. With such legislative impotence at hand, government and the president are paralyzed and unable to distract the market, leaving the economy free to choose its own course.

  The budget surplus is going to pile up dramatically because Congress won't agree on big tax cuts or big spending hikes.  
  Greg Valliere
Chief Strategist
Charles Schwab Washington Research Group
"One of the big stories coming out of this is the inability to get anything done in the next two years," said Greg Valliere, chief strategist at Charles Schwab Washington Research Group. "Therefore ... the budget surplus is going to pile up dramatically because Congress won't agree on big tax cuts or big spending hikes."

The November elections yielded a stalemate of sorts in Congress. In the new House of Representatives, Republicans and Democrats will be separated by just five votes. The 100-member Senate is split right down the middle, 50-50.

If members of Congress routinely vote along party lines, few initiatives will pass with a strong mandate, and overturning a presidential veto will be rare.

So, unless these elected men and women adopt an overwhelming sense of nation-healing and a can't-we-all-just-get-along spirit, the new Republican president, who received fewer popular votes than Democratic opponent Al Gore, is in for a tough fight.

Bush? Gore? Fine. Just keep Greenspan happy

Certainly, the man who holds the keys to the White House's Oval Office is important to Wall Street, but perhaps not as key as the man who wields the gavel at Federal Reserve meetings.

graphicAlan Greenspan, chairman of the Fed, which has advised on fiscal and monetary policy through the recent boom years, is expected to be around for at least another four potentially gridlocked -- years.

"If we have an economy that functions O.K., with a little help from the Fed, in that case gridlock is quite good for the market," said Ethan Harris, a senior economist at Lehman Brothers in New York.

The surplus and the Federal Reserve are key, he notes. If Greenspan and his inflation watchdogs continue to steer the economy well, the budget surplus remains protected, and Bush's regime is lucky enough to avoid international crisis, the market can bear legislative inaction and gridlock.

"The surplus creates an environment where there's a tremendous amount of saving being freed up for private investment every time the government pays down its debt, that frees funds to flow into private investments," Harris said. "That has created this strong growth economy that we have."

"In terms of the overall budget stance, the best thing for the market is for them to leave things alone and let the surplus continue to pile up," he said.

Should the president and Congress fail to get the wheels of change rolling in coming months, experts say the big winner may be the nation's ability to pay down its debt something of a back-burner issue now that the government forecast the surplus to swell to $4 trillion in a decade.

"Gridlock leads to more debt reduction than either tax cuts or new spending," said Rob Palombi, a senior analyst with Standard & Poor's MMS in Toronto. "Because what we will be left with at the end of the day are larger surpluses."

So who benefits from gridlock?

Despite Wall Street's affection for gridlock, the investment community is friendly towards Bush's pro-business proposals, the most significant of which are his broad tax cut plans. Other ideas floated by the Texas governor include a notion to plunk down $158 billion to tweak the U.S. health care system, and to raise the ceiling on corporate giving.


In theory, Wall Street likes tax cuts because they would arm consumers with more spending cash -- money that shows up in corporate profits and, ultimately, Wall Street.

Fund managers might also benefit from another Bush proposal to allow individuals to invest some part of their Social Security savings in the market.

And despite the problems Congress may face, industries that backed Bush's candidacy, such as tobacco, defense and oil, may still receive the blessing of relaxed regulatory scrutiny during a Bush administration.

Click here to read CNNfn's special report "The politics of business"

"Bush would be the favorite for a lot of regulated sectors," Charles Schwab's Valliere added. "So we could see, once again, a play for Microsoft (MSFT: Research, Estimates), energy stocks and drug stocks, if Bush ultimately does pull this out."

James Lucier, a political analyst for Prudential Securities in Washington, suggests that certain issues may tiptoe past the partisan grappling, such as high-tech legislation, a relatively new topic for which neither party has claimed outright control,

"These are issues that transcend previous party distinctions, where you have a very strong coalition between republicans who are willing to deregulate and do whatever it takes to get government out of business's way, and new democrats, who are very tech-friendly," Lucier said.

"If Bush gets in there, it's going to be a very good season for hi-tech legislation," he added.

Voters may also be winners, of sorts. Elected representatives may be forced to listen more closely to voters particularly with the entire House of Representatives up for grabs in the 2002 election. Should public sentiment sway towards increased spending, many Republicans may have to support such legislation. The same is true for Democrats and spending cuts.

"Because of the gridlock, politicians on both sides of the political spectrum will have to be more acutely aware of what the voting public is leaning towards," said S&P's Palombi.

"They won't have large margins of support in either the House or the Senate to go off in their own direction, so the public should have a larger say or greater influence than perhaps is traditionally the case," he said. "It really remains up to the public to determine how it all plays out." graphic


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