View Full Version : Forget The Myth About The Stock Run-Up Into Midterms; Goldman Explains Why

4th August 2010, 06:05 AM
Forget The Myth About The Stock Run-Up Into Midterms; Goldman Explains Why

Goldman's economic team continues its string of market negative output, this time focusing on debunking the myth of an expected market run up into the mid-term election in 3 months. Contrary to the attempts of numerous pundits who consistently try to create a self-fulfilling prophecy and allow themselves better exit points on legacy underwater positions, Goldman performs a statistical analysis and reports that while in the past the stock run up has in fact occurred after the mid-terms, this was traditionally accompanied by loosening fiscal and/or monetary policy, resulting in a boost to the economy. As Goldman's Alec Phillips says: "For various reasons, market participants tend to take a more optimistic view of growth following the midterm election." And for all those who think this time is different, fiscal loosening post the elections will be hard to come by, and will be further impacted by the natural contraction of the economy following 2+ years of fiscal gluttony. Goldman says: "By contrast, our own estimates imply a tightening of fiscal policy in 2011, including decreased transfer payments as a result of expired unemployment benefits and increased tax liabilities as a result of tax expirations, and while we don’t have quarterly estimates for 2012, our budget projections assume additional further restraint on an annual basis then as well." In other words next time someone says that the market traditionally runs up into midterms, be aware they are uninformed. And not only that, but it is far more than likely that the stock market will drop after November, as the unprecedented disconnect between the contracting economy and the irrational stock market, finally collapses.

From Goldman's Alec Phillips:

The Midterm Election and Fiscal Policy: This Time Is Different?

•With the midterm election three months away, some market participants appear to be expecting additional policy stimulus in order to provide one last boost to the economy. There are several items on the table, including aid to state governments, tax measures such as bonus depreciation, credit programs for small business and commercial real estate, and the ever-present possibility of additional policy activity in the mortgage market.

•But despite what would seem to be an obvious motivation to provide additional support to the economy, previous electoral cycles do not indicate a pattern of stimulus ahead of midterm elections, at least not through fiscal policy. To the contrary, cyclically adjusted federal net saving is at its most stable, on average, leading up to the midterm compared with at any other point in the four year political cycle.

•Moreover, the current expansive fiscal policy is set to reverse, putting it on the opposite path of policy seen in most election cycles, when fiscal policy normally provides additional support for the economy between the midterm and presidential elections. So while the midterm is often seen as a turning point for markets and may well have other implications outside of fiscal policy, from the fiscal perspective this time may be different.

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