It seems ever more likely that the Democrats will capture one or possibly both houses of Congress. But the Big Money crowd on Wall Street seems as if they couldn't care less. The Dow Jones industrial average is up 2.3 percent since the Mark Foley scandal broke, an event reversing a monthlong buildup of GOP political momentum. That, even though studies show investorsincluding this new one out of Stanford and Wharton business schoolstend to prefer Republicans over Democrats.
Here are a couple of reasons:
-The market has done just fine in the past during periods of mixed government. A Goldman Sachs study looking at market performance in the 14 months after midterm elections since 1950 found that the S&P 500 did a bit betterby 2 percentage pointswhen the elections resulted in each party controlling one house of Congress vs. one party dominating both. So gridlock hardly means catastrophe.
-The second explanation comes courtesy of Charles Gabriel, political analyst at the Washington research arm of Prudential Securities. In a recent chat, Gabriel pointed out that Congress has already passedand President Bush signeda key piece of legislation that really affects investors: last May's Tax Increase Prevention and Reconciliation Act, which extended the Bush tax cuts for dividends and capital gains until 2010. Passage provided a bit of inoculation against market jitters. "And Bush will still be there to veto any legislation that is really antimarket," he adds.
What does Gabriel think will be the big economic policy battle coming out of the next Congress?
"Next year will be the year of trade," he says. Expect a contentious battle over White House efforts to win renewal of trade-negotiating powers that expire in July. So-called fast track authority gives the president the power to negotiate trade deals that Congress then votes on in their entirety. Gabriel also expects Bush to make another push toward reforming the tax code.