Today, Ted Kennedy’s Senate seat is up for grabs in Massachusetts. Shocking as it may seem, polls indicate that the Republican candidate Scott Brown actually has a shot at beating Democrat Martha Coakley. Like Megan, I have my doubts that this will happen. It just seems beyond belief that Kennedy’s seat could fall into the hands of Republicans.
Still, there’s been a lot of speculation regarding what a Brown win could mean for health care reform. But what about the broader business picture? What would a Brown win mean for the market and business?
Last Friday, CNBC investing pundit Jim Cramer proclaimed that the market would celebrate a Brown win. First he explained that if it causes health care reform’s failure, then the stocks of HMO’s, pharmaceuticals and medical device makers would all take a major hit. But then he continues (full video at end of post):
More important, though, I think investors who are nervous about the dictatorship of the Pelosi proletariat will feel at ease, and we could have a gigantic rally off a Coakley loss and a Brown win. It will be a signal that a more pro-business, less pro-labor government could be in front of us.
In general, I wouldn’t be so convinced that the market would be looking for one specific party or the other to lose its rubber stamp. In general, the market loves gridlock, no matter who is in power. And if Democrats lose their 60-seat filibuster-proof majority, then the investors and traders could be very pleased. Gridlock means less legislation and less political uncertainty. Suddenly political risk has a smaller effect in the equation.
But thinking about some of the major legislative efforts on Democrats agenda, I can also see where Cramer is coming from when singling out Pelosi & co., in particular. First, there’s health care. Although Congress’ reform push is a boon for the medical industry, it would be incredibly costly for everyone else in business. Cap and trade would put business in a similar situation. Some big firms who benefit from receiving the carbon credits for free from the government would benefit, but essentially everyone else — especially small business — would suffer. Pro-union legislation could also be pushed aside.
So my interpretation of the Democrats retaining their majority would be that big business would mostly be just fine, but smaller firms probably won’t fare as well. They’ll have more trouble competing if health care reform, cap and trade and stricter regulation triumph. If those efforts are in jeopardy, then the market could be pleased. A broader recovery in small business would also likely mean a faster economic recovery, since small business is a more major driver for job creation.
Then, there are taxes. They’ll have to rise before too long, given the nation’s deficit woes, but you can be pretty sure that Republicans will resist any tax increases with all their might. Again, the market would love such an outcome. Lower taxes mean higher corporate earnings, which bring higher stock prices.
But ultimately, I’d be surprised if we really had true gridlock, even with a Brown win. Instead, I think you’ll see legislation get through, but it will have a distinctive Republican influence. In the health care reform debate, Republicans had little voice regarding what the bill looked like. If Democrats lose #60, I’d expect that to change. That’s what we’re already beginning to see with the Senate version of financial reform. Other measures that also eventually pass could, again, be reshaped in order to drum up Republican support.
The market would still appreciate such an outcome. It prefers moderate action, because that changes the equation less, as opposed to strong partisan politics. And a Brown win might result in exactly the kind of inaction or weak action by Washington that investors would celebrate.
