Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

U.S. Midterm Elections: Would a Republican Win Be Bullish for the Stock Market?

Stock-Markets / Stock Markets 2014 Oct 30, 2014 - 03:15 PM GMT

By: John_Mauldin

Stock-Markets

I had an instant-messenger conversation with one of my clients the other day. It was pretty annoying—he wrote things like “BULL MARKET, DUDE,” and harangued me about my net-short positioning.

Then he started telling me that the market was going to rip if the Republicans took both houses of Congress in the midterm elections. At that point, I felt like I needed to intervene.


First of all, just about every single piece of academic research on the subject shows that the stock market (and GDP, and many other metrics) outperforms under Democratic presidents.

You don’t need to look very far for a contemporary example, considering that the stock market has done a three-bagger under our current leader, and the economy has recovered.

Wait, that doesn’t make any sense. The current administration is the least friendly to business and private enterprise in recent history—so why have stocks been in a prolonged bull market?

There are a million reasons why, but let’s focus on the biggest and most obvious one: the Federal Reserve.

Shaping the Fed Board of Governors

Lots of people have opinions on the Fed without really knowing the Fed as an institution or how it works.

To review, there are seven members of the Federal Reserve’s Board of Governors who live and work in Washington, DC. They are presidential appointees, and their term of service is 14 years.

There are 12 regional bank presidents, who are nominated by their respective boards of directors. They are not, theoretically speaking, political appointees. Four of them at a time serve on the FOMC, on a rotational basis. The president of the New York Fed is a permanent member of the FOMC. Their term of service is five years.

In the old days, a Fed governor would serve all 14 years, but now they have to go make money on the speaker circuit, so they serve only three to five years if they are lucky. This means that a two-term president has the opportunity to “pack the court” with Fed governors of similar political affiliation over an eight-year period.

I would argue that the power to shape the Fed Board of Governors is even greater than the power to shape the Supreme Court.

Look at the current Board of Governors:
Janet Yellen
Stanley Fischer
Daniel Tarullo
Jerome Powell
Lael Brainard

There are two vacancies, but these are all Obama appointees. Yellen served as president of the San Francisco Fed before joining the Board of Governors as vice chair.

By and large, you can divide up central bankers into two camps: dovish central bankers, who prefer easy monetary policy (low interest rates) and hawkish central bankers, who prefer tighter monetary policy (high interest rates). Dovish central bankers tend to be Democrats. Hawks tend to be Republicans. It’s not a one-for-one correlation, but it’s close.

Everyone currently on the Board of Governors is a dove. (Powell is sometimes thought of as a centrist.) There are some hawks at the regional Federal Reserve banks, since the boards of directors are businesspeople and tend to appoint other businesspeople. Jeffrey Lacker, Charles Plosser, and Richard Fisher are all notable hawks. Inconveniently, though, they only end up on the FOMC once every three years.

George W. Bush packed the Fed, too (Duke, Warsh, Mishkin, Kroszner), but his appointees are all gone now. However, if they had served out their 14-year terms, they would still be around, and we would have a much more balanced Fed.

What Life Would Look Like Under a Hawkish Fed

Even though the presidential election is two years away, I think it’s worth having this conversation today. Seriously, what would happen if someone like Rand Paul became president? And Congress were solidly Republican?

Let’s start with the Fed. Yellen would not be reappointed; that is very clear. Over the course of a few years, the Board of Governors would be reshaped.

It’s hard to imagine in a day and age where every time a relatively benign stock market correction occurs, Fed officials are dropping hints of quantitative easing, but a hawkish Fed wouldn’t go for that kind of stuff. It would allow the market to purge its own excesses. It might even be a little laissez-faire.

We’ve had an interventionist Fed and an interventionist monetary policy on and off throughout the history of central banking, but especially since 1998, when the Greenspan Fed bailed out everyone during the blowup of Long-Term Capital Management (LTCM).

I remember reading articles about the “Greenspan Put” in 2000. That turned into the Bernanke Put, then the Yellen Put, and more recently, the Bullard Put. If there’s a perception that the Fed doesn’t allow the stock market to go down, it is probably because the Fed really doesn’t want the market to go down.

All kinds of conspiracy theories have blossomed from this (the Plunge Protection Team, for example), which I don’t like. But the Fed has nobody to blame but itself.

Under a hawkish Fed, valuations would be sharply lower. “Sharply” is italicized here for a reason. If we get away from QE and ZIRP and back to something resembling a normal rate environment, you’d be looking at the stock market being down 20-40%.

Would a Republican Midterm Win Be Bullish?

Aside from the Federal Reserve, a Republican administration, together with Congress, would completely reshape government, in ways that we can’t even conceive of right now. Would the resulting legislation be more business-friendly? Well, it might be more market-friendly, and market-friendly and business-friendly are two different things.

I think there is a reason that the stock market outperforms during Democratic administrations. Two, actually.

  1. Republicans appoint hawkish Fed officials who tend to tank the market.
  2. Republicans tend to pass supply-side legislation, which works with a long lag.

I think Reagan should get credit for the massive expansion of the ‘80s and ‘90s, and Clinton should get credit for expanding free trade, but people forget that the early years of Reagan’s presidency were very tough. Paul Volcker unleashed a hurricane-force bear market—the ‘82 recession was one of the worst on record, though the economy recovered quickly.

So, no—I don’t think it’s clear that Republicans winning the midterm elections is bullish at all, aside from what a few computer algorithms will do the day after. In fact, I think it could be the prelude to a lot of pain in the markets.

I’m sure investors will be exchanging some inadvisable fist bumps the morning after Election Day. When George W. Bush was reelected in 2004, the market went bananas, but let’s not forget that he campaigned on lower taxes on dividends and capital gains. 2016 will be very, very different.


Jared Dillian

The article The 10th Man: Midterm Elections: Would a Republican Win Be Bullish for the Stock Market? was originally published at mauldineconomics.com.

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules