Thursday, March 11, 2010

The Democratic Stock Market

If you believe what many Congressional Republicans and Tea Partiers are saying, the stock market should be down around 3,000. The deficit spending, tax raising Obama administration, hellbent on an expensive reformation of the health insurance system, would surely have driven the economy into the ground by now, with a socialist wasteland our only future. But the market is reaching post-crash highs almost every trading day, and scarcely a wisp of a cirrus cloud mars the clear blue skies over Wall Street.

The stock market and the conservatives can’t both be right. If conservative, free market economists correctly propound that stock prices rationally incorporate all public information, then the Democrats must be on the right path. Onward with health insurance reform, tax increases, etc. Otherwise, you'd have to deviate from free market orthodoxy and conclude that the stock market is really stupid. After all, those humongous deficits and tax increases are about as secret as Kate Gosselin’s new gig on Dancing with the Stars. Maybe now is the time to sell all your equity holdings before the market figures out what a mess things are and crashes.

Of course, conservatives wouldn’t admit that the federal government might be turning things around, even though that’s what some statistics indicate. If the turnaround is true, there won’t be much for them to scream about in the mid-term elections this fall. Voters won’t fix an economy on the mend.

The stock market could be wrong. After all, the Dow Jones Industrial Average reached its all time numerical intraday high of 14,279.96 on Oct. 11, 2007, months after the mortgage mess blew up. The market sure as heck missed the ball on that one. There is plenty of reason now to question the market’s upside potential. The economy is still losing jobs (the recent “positive” news was that it lost fewer than expected, but fewer jobs means less consumer spending). Consumer credit expanded a bit, although incomes haven’t grown and banks are still cutting credit lines. States and municipalities are likely to lay off many thousands of employees as their finances become increasingly strained. Imports and exports have both fallen, which isn't what rebounding economies do. And real estate won't ride to the rescue, not with home prices stagnant or falling.

Yet, one thing's for sure: stock indexes keep rising. That favors the incumbent party. If the market continues to be so friendly toward the Democrats, expect the fall elections to be contests.

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