Economic Outlook: The gridlock myth

By ANTHONY HALL, United Press International  |  Dec. 28, 2012 at 10:26 AM
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One has to entertain the possibility that the powers that be in Washington enjoy scaring investors half to death.

Otherwise, why would they do it?

That is, why would they do it over and over again? Can the current drama queens in Washington consider no alternative other than this?

It's certainly not the first time a Democratic president has squared off with a Republican-controlled House of Representatives.

In point of fact, the study has been done. Since 1973, said Eric Singer, then the manager of the Congressional Effect Fund, times when the government is split have been extremely prosperous on Wall Street with the Standard and Poor's 500 index rising "a fabulous 15.3 percent in gridlock years."

When one party controls the House, the Senate and the White House, however, the so-called unified years, the S&P has dropped "a horrible 9.9 percent," Singer noted in a study done in 2010.

How does that pattern hold up now?

Certainly, it would hold up remarkably well in the long term. When President Obama took the oath as president, the Standard and Poor's index stood at 890 points. On Thursday it closed at 1,418 points, gaining a more than fabulous 59 percent.

Wait -- that's not fair. The George Bush years weren't a tough act to follow. The economy was in a black hole in January 2009.

Nevertheless, the numbers tell the tale.

This week the statistic doesn't hold up but studying the stock markets day by day isn't as useful as taking a longer view. There have been plenty of ups and downs since January 2009 that belie the long-term numbers.

The question this provokes is a test of nerves: Will the current "fiscal cliff" impasse break the rule and actually slow growth in stock indexes, even send the S&P index back in a tailspin toward 890 points?

It doesn't quite look that way today. The markets, analysts say, have taken the current fiscal debacle more or less in stride and cooler heads are looking in detail at the "fiscal cliff" and coming to the conclusion that the impact will be gradual, rather than the abrupt crash the image of falling off a cliff might suggest.

Should the U.S. economy slide back into a recession and unemployment rise to 9.1 percent, as a government study indicated, there will be a sizable adjustment in equity markets. For now, even the week-to-week slump isn't as horrific as it might have been. But darker days could be around the corner if the current gridlock persists.

In international markets Friday the Nikkei 225 index in Japan gained 0.7 percent, while the Shanghai composite index in China rose 1.24 percent. The Hang Seng index in Hong Kong added 0.21 percent, while the Sensex in India climbed 0.63 percent.

The S&P/ASX 200 in Australia rose 0.5 percent.

In midday trading in Europe, the FTSE 100 index in Britain dropped 0.58 percent, while the DAX 30 in Germany fell 0.57 percent. The CAC 40 in France slid 1.31 percent, while the Stoxx Europe 600 declined 0.66 percent.

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