Political stalemate will endure, to Wall Street's delight

Wall Street isn't scared by the prospect of political deadlock in Washington.

"Gridlock will be a good thing," says Subodh Kumar, chief investment strategist with CIBC World Markets, with offices in Toronto and New York. "The ability to follow an ideological agenda is sharply reduced."

The winner of the presidential race has to deal with an almost evenly divided Congress. He also doesn't have a sharp mandate from the electorate himself. The popular vote was extremely close between the two candidates.

"Luckily," says Charles Schultze, chief economic adviser for former President Jimmy Carter, the new president "will be unable to deliver" on his major campaign promises.

A President George W. Bush likely won't get his major $1.3 trillion 10-year tax cut through the Senate.

"He doesn't have the votes," says Stanley Collender, a veteran budget analyst. "He doesn't have the money either."

Congress this fall stepped up spending on federal programs in a bid to curry voter favor.

Possibly, but not certainly, the Republican-led Congress will work out a small tax cut with President Clinton when it comes back for a post-election session on Wednesday to wrap up the budget for fiscal 2001.

"It's not clear the Democrats have to give the Republicans a victory," says Mr. Collender, of Fleishman-Hillard Inc., a Washington consulting firm.

Neither could a President Al Gore get much of his targeted tax cuts and expanded social programs past the newly elected Republican Congress.

As a result, more of the federal budget surplus will go toward reducing the national debt. This should lower interest rates, thereby boosting bond prices and perhaps stock prices.

As a rule, investors dislike uncertainty. So stocks declined a bit amid election concerns. Assuming a Bush presidency, though, stock prices of drug, tobacco, and oil companies rose.

Since the end of World War II, the November-to-January periods have been the best three-month stretch for stocks on the calendar, notes Michael Flament, an economist with Wright Investors Service in Bridgeport, Conn. The Standard & Poor's 500 stock index has averaged a 4.8 percent rise for these months, twice the average for all three-month periods. Investors grant the incoming administration "some sort of a honeymoon," he suggests.

Taking a look at a longer time span, a Merrill Lynch analyst notes that since 1901, the Dow Jones Industrial Average has registered an average gain of 5.1 percent in the year after Republican victories, and 6.2 percent after Democratic victories.

As Wall Street sees it, the fact that a huge tax cut is now unlikely decreases any danger that the Federal Reserve will be prompted to raise interest rates to counter a fiscal stimulus to the economy.

Fed policymakers meet Wednesday. They aren't expected to raise interest rates.

"The Fed is more comfortable," says Mr. Kumar.

With the political stalemate in Washington, the Fed's position in economic policymaking could be strengthened.

"It gains more authority under these conditions," says Henry Kaufman, a famed Wall Street economist.

Economists do not expect the nation's continued prosperity to be disturbed by the new president, at least in the short run.

The Fed's monetary policy has much more influence on economic expansion than either the White House or Congress.

But the new president could have an impact on future Fed decisions in filling several Fed governor slots. He also can influence regulation.

Another consequence of the close political split is that it is unlikely that there will be any significant change in the Social Security system.

"There is no consensus on what to do with it," says Collender. So major changes "won't happen."

"Conditions have to be right," says Beryl Sprinkel, who was chairman of President Reagan's Council of Economic Advisers for his second term.

Mr. Sprinkel, busy writing his memoirs at his Florida home, sees a President Bush as having a chance to get his programs through by enlisting the help of "moderate Democrats" - as Reagan did in the 1980s.

Collender doubts it. The atmosphere in Washington remains "poisonous," he says. "Nothing out there indicates the two sides have learned to play in the same sandbox."

With a congressional election only two years away, he expects the two parties to be looking for issues that offer them a political advantage for retaining power or obtaining power in a narrowly divided Congress.

(c) Copyright 2000. The Christian Science Publishing Society