Wall Street reacted to the 2006 mid-term election with a collective yawn because the outcome-governmental gridlock-was fairly predictable, says William Bernhard, a University of Illinois political science professor in LAS.
The election itself was anything but predictable, with the Senate switching to the Democrats by a whisker-thin margin. Even the House results didn't appear all that predictable, if media coverage leading up to the election served as your gauge.
"However, if you took a broader perspective, gridlock was the predictable result, no matter if the Republicans maintained control or the Democrats took control," Bernhard says.
Investors generally like political predictability, and they sometimes even like gridlock.
"If we're in a bad place economically, then gridlock is viewed as bad," Bernhard says. "But if the status quo is good for investors, then gridlock will be viewed as good. And right now things are pretty good for Wall Street."
With gridlock, that means the government may not be able to do anything to disrupt the positive status quo.
"Even if the Republicans had held on, with a lame duck president they weren't going to accomplish any major policy changes over the next two years," Bernhard adds. "Markets knew that not much is going to happen, so traders built that into their behavior months ago."
The Dow and Nasdaq moved up slightly after this year's mid-term election, according to Bernhard. But that simply continued the trajectory of the past year.
The ho-hum reaction by Wall Street also bolsters the argument made in Bernhard's recent research with David Leblang of the University of Colorado. Their studies, which focused on Europe and the U.S., have shown that markets don't react much to political events like elections when the outcome is predictable.
In the United States, most presidential elections have been historically predictable, he also argues.
"We knew Clinton was going to beat Dole," Bernhard says. "We knew Reagan was going to beat Mondale, and we were pretty confident that Bush was going to beat Dukakis. None of these outcomes came as a surprise to anybody but true believers."
The 2000 election between Al Gore and George W. Bush, however, was an exception to this predictable pattern, of course. Bernhard says their research tracked how the unpredictability of that election affected the overnight markets on an almost minute-by-minute basis on the night of the election.
Because economic conditions were healthy in 2000, Wall Street once again saw the status quo in a positive light. Knowing that Gore would maintain the status quo of the Clinton years, the markets went up whenever the probability of a Gore victory increased. But whenever the probability of a Bush win increased, the markets went down. Bush was too much of an unknown.
"Wall Street is making investments for the future," Bernhard says. "So they want to be able to know what the policy environment is going to be like in the future."
Political predictability gives them that knowledge.
