Can the stock market be rallying in anticipation of the Dems taking over Congress? I’d like to think so, but it ain’t true. The market is rising mainly because oil prices are dropping and the Fed has eased up.
Anyone who thinks the market reacts to who’s in charge of Congress or even the White House doesn’t know economics and is blissfully ignorant of politics. The truth is, there’s not much politicians can do to stimulate or retard the economy. Tax policies have a marginal impact, at best. Bill Clinton raised taxes and the market went up. George Bush cut taxes and the market went up. Supply-siders think tax rates are a big deal. They’re wrong. Democrats could roll back all the Bush tax cuts and the market would be indifferent.
Deficits do matter because large ones can spook the market into fearing the Fed will raise interest rates to counteract the inflationary tendencies of big deficits. But for the next few years, at least, federal budget deficits won’t be anything to worry about. The baby boomers’ coming retirements will turn Medicare into a sinkhole, but that’s well into the future, and markets don’t think ahead that far. Balance of payments deficits matter because very large ones can one day cause speculators to dump dollars, generating inflation and pushing up interest rates. But politicians can’t control this.
When and if there’s another terrorist strike in America, the market will quake. And politicians do have some effect on this. According to the National Intelligence Estimate, Bush’s war in Iraq has increased the number and intensity of people who hate the United States, some of whom will turn to terrorism. But markets don’t know how to evaluate this risk in the abstract. So here again, which party controls Congress won’t have much immediate effect on the market.
Other things that could push the market up or down – the discovery of new oil fields, a spike in demand of commodities led by China, a bird flu or another major contagion that infests America, major damage from a natural disaster – are not in the province of legislators, either.
So there you have it. As much as I’d like to claim the current bull market as the “Pelosi Rally,” I can’t.