Jimmy is a 9 year old boy who lived in a modest, middle class home. With Christmas coming around the corner he was hoping he would get a new baseball mitt to replace the old tattered one that had been handed down to him by his brother. He had been extra good the past few months, so he was pretty sure he was going to get his new Spalding mitt. Then one day he overheard his parents talking, and he could swear that he heard them talking about a bicycle. WOW! That would be incredible. With his dad having been recently laid off, he wouldn’t have even dreamed about getting a new bike. As Christmas grew closer his excitement increased. On Christmas morning Jimmy rushed down the steps to see his new bike. His parents where already downstairs, waiting to see the excitement on Jimmy’s face. When he looked under the tree, there laid his brand new Spalding baseball mitt that he had wanted so much.
His parents were confused when a look of disappointment crossed Jimmy’s face. This is the mitt he had been begging for the whole year. Why was he disappointed? The truth is Jimmy would have been perfectly happy with the mitt had he not thought that he may be getting a new bike instead. I would argue that the business community and the stock market are facing the same dilemma as Jimmy. Last November, the vast majority of the people assumed that the Democrats would hold the White House, and that divided government would continue as it had for the past six years. While not terrible, the political impasse resulted in stagnant economic growth, and a middle class whose wages hadn’t kept up with inflation.
With Republicans now controlling all three branches of government, a feeling of optimism swept through the business and investment community. The hope was that there would be a more urgent focus on stimulating the economy, and rebuilding the long ignored middle class. And, just as importantly, there would be a united government to actually pass some meaningful legislation to get this accomplished.
This can largely explain the immediate positive response that the stock market had to the election results. In short, U.S. businesses and the stock market thought they were getting a shiny new bike! So here we are today, roughly six months out from the election. While much has been done through executive orders, virtually nothing has been accomplished legislatively. Even though the Republicans hold a large majority in the House of Representatives, they have not been able to pass any bills that would be viewed as an economic stimulus.
At the Crossroads
We are fast approaching a crossroad where the business community and investors need to start seeing some tangible evidence that progress is being made towards jumpstarting the economy and rebuilding our forgotten middle class.
Many are frustrated that the House didn’t initially focus on legislation that would be easier to pass, such as regulation reform, repatriating some of the $2.5 trillion dollars that corporations are holding overseas, or a smaller infrastructure bill. Some of these issues could have been passed by a simple Republican majority, but also could have brought over some democratic support as well, thus building some momentum for larger issues down the road. Instead, the first issue tackled was the 800 pound gorilla – the Affordable Care Act.
This perceived lack of progress is both frustrating and potentially dangerous. If the business community and investors begin to feel that this opportunity to refocus on the economy along with a united government is being squandered, and we don’t get the bike – look out. If we go back to politics as usual, and nothing is accomplished the economy could slump and the stock market could take a substantial drop. At the same time, if Congress does get its act together, and is successful in passing some meaningful legislation, this economy along with the stock market could respond very positively. After a couple of years of stagnation, the stock market appears to still be looking for a reason to go up. It seems to react very positively to any good news, and discounting much of the bad news.
So What does This Mean?
As long as businesses and investors continue to feel that something positive will be done by Congress in the near term, we are probably OK. This puts a lot of pressure on our politicians on both sides of the aisle, to put aside their petty political differences and finally prove to the American people that they are capable of doing what’s right for the country.
With the midterm elections coming up already next year, they don’t have too much more time to waste. We’ll be watching very closely over the next few months to see what Congress will be able to accomplish. And of course we’ll keep you posted.
As for me, I am still hopeful that we’re going to get the bike!