I & I Editorial BoardDemocrats have been giddy following the strong rise in the major U.S. stock market indexes the day after their blue wave crashed over Congress, giving them back control of both houses and leaving badly defeated Republicans as a demoralized minority. So do stock market investors like socialism? Hardly.
One thing is clear from this election: the Democratic Party mainly flies these days on its left wing. There are very few Democratic moderates and even fewer conservatives (if any) among Democrats. With its open embrace of the Democratic Socialists of America and its alliance with politically radical Islam, it is now all but in name a socialist party.
But that isn’t what the stock market was applauding on Wednesday.
OK, so why did the S&P500 Index gain 1.6%, the Dow 30 a whopping 3%, and the Nasdaq 1.4% the day after the Democrats shellacked the Republicans?
Relax. The markets haven’t gone socialist. They are, as always, highly pragmatic.
As we wrote just yesterday, “the only thing we know for sure is that for the next two years, Washington, D.C., will be in a state of gridlock while Democrats unleash a torrent of investigations, impeachments, and endless claims of corruption and wrongdoing.”
Yes, “gridlock,” which is just another word for restoring lost political equilibrium through the ballot box.
That’s why the market often does well after midterm elections. Midterm elections are usually a course correction for voters who feel angry or betrayed by a political party or a charismatic leader. And that can create a deeply divided government. Also known as gridlock.
The truth is, markets like midterm elections because of this process, not despite it.
President Donald Trump, after congratulating Democrats on their big victory, noted almost casually that he intends to veto Democratic bills he doesn’t like. No surprise there. A veto is a powerful thing: It takes two-thirds of both chambers of Congress to override one. That’s real gridlock.
So regardless of what Democrats might want, unless they play ball with the now-minority Republicans in the House and Senate and with Trump, they’re unlikely to get it.
And their threats to impeach Trump or indict him won’t help, only gum up the works. Little or nothing they want will get done. And their institutional TDS, if not treated, will only make the gridlock worse.
That’s just fine with the markets. Indeed, the magical reset button that is our midterm election process usually gives markets a solid boost, according to stock market research. So no one should be too surprised at this.
In fact, according to the Stocktrader’s Almanac, “six months after the past 19 midterm elections, the S&P 500 has been higher 100% of the time, with an average gain of 14.18%.”
Calculations by Yahoo Finance extend that even further, noting that whether Congress was “blue, red or divided, stocks rose in the year after every midterm since 1946,” with the bellwether S&P 500 Index higher after every midterm election by an average of 14%.
But still, of course, there are individual issues that might yet hurt stock prices during the year, leading to declines. Now, that could include hostility toward AI and data centers. Or Congress tinkering with the size and makeup of the Supreme Court, or even trying to make major changes to the Constitution. Or continued high energy prices and inflation due to the Iran conflict. Or punitive tax hikes or lawfare targeting highly productive billionaires and businesses that the Dems dislike, but that markets like.
Or extreme legislation reflecting the dangerously growing clout of socialism within the Democratic Party.
Gridlock makes all of those things less of a threat, not more of one.
By the way, we’re not making stock market predictions here. But it’s entirely safe to say the record of solid stock market gains made in the year after midterm elections is incredibly strong. Why? As we said, in midterms voters can blow off steam by voting to give the party out of power a path back in. And when the president is a member of the other party, that’s real gridlock.
Unlike highly partisan voters, most investors focus on companies’ success in growing markets and earnings, and on overall economic health. So far from a vote of confidence in the far-left Dems and their newfound love of socialism, surging markets on Wednesday were betting that good old-fashioned gridlock will help keep capitalism humming.
— Written by the I&I Editorial Board
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