Published September 23, 2013
Political gridlock might be bad for the nation, but it's good for the stock market, so goes a popular axiom. But is that always true?
The news media is now reporting:
"Hardening positions on the federal budget and borrowing limit, and recent political setbacks suffered by both President Barack Obama and Republican congressional leaders as they go into the fight, are raising the odds of a government shutdown, debt default or near-miss that could roil equities markets."
During 2011, the debt ceiling fight (political gridlock) between U.S. politicians, shook the S&P 500 stock index (SPY) to a 16.58% decline from Jul.22 to Aug.8. (See chart below) The Aug.8 date was the first day of trading after the U.S. government's credit downgrade by Standard & Poor's from AAA to AA+. Although stocks (SCHB) gained 12% thereafter, the S&P 500 ended the year basically flat.
Since the federal debt limit was raised to $16.69 trillion in May, the U.S. Treasury has been using "extraordinary measures" to avoid defaulting on the nation's debts. By mid-October, these extraordinary measures will be completely exhausted unless Congress steps in.
Thus far this year, the VIX, which measures stock market fear or volatility (CBOE:^VIX), has experienced a sudden spike roughly every two-months. On June 20, the VIX (VXX) hit a yearly high of 20.49.
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President Obama's approval rating is currently 44%, according to Gallup's latest poll. The Dow Jones Industrial Average (DIA) has gained 12.3% over the past five decades proceeding Obama's first term, when presidential approval ratings hover between 35% to 50%, according to Ned Davis Research.
As presidential job approval ratings sink, so do stock market returns. When approval ratings fall between 50% and 65%, the Dow had an average annualized gain of just 5.4%. President Obama's low point in approval ratings was 38% from Oct.15-17, 2011.
The average approval rating for U.S. presidents over the past 75 years is 54%.
Contrary to conventional wisdom, political gridlock is not always good for the stock market - especially when it involves the potential for government debt defaults and other bizarre scenarios that our generation has never seen or experienced.
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