Last week, I said that Wall Street’s focus will be on the economy in the weeks to come. On cue, the economic data stunk badly enough to draw everyone’s attention. Second-quarter GDP growth was modest, and estimated first-quarter growth was revised down to a fraction of a percentage point. The ISM chimed in with a manufacturing survey that suggested that the third quarter is not off to a good start and that the short-term future may not be any better.
Republicans and Democrats agreed to budget cuts and a promise to pursue more deficit reduction actions in exchange for raising the debt ceiling. As you know, the legislation is universally disliked. What it does do, however, is make it harder for Congress and the president to do something about the economy. Additional tax cuts or spending will need to be offset in some manner, especially with the credit rating agencies breathing down Uncle Sam’s neck.
Legislation often has unintended consequences. The debt ceiling law has the potential to throw a wrench in to the presidential cycle for stocks. The third year of a presidential term has historically been good for investors, with the Dow Jones industrial average appreciating every time since 1939. Jeff Hirsch, author of “The Stock Trader’s Almanac,” says that this is because presidents seek to make voters happy ahead of forthcoming elections.
Often, presidents have pushed for some type of economic stimulus. Jeff told me yesterday that the markets have also historically reacted to a cooperative environment in Washington that puts the U.S. in a good place. This has included actions involving both domestic and foreign issues.