Gridlock, taxes factor in stock rally

Stocks have rallied dramatically in September as Republicans look increasingly like they will retake control of the House — and possibly the Senate.

The likelihood of increased gridlock and a divided government is one reason for the market’s rally, though analysts say other factors are likely having a bigger influence.

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“The big thing is the Fed,” said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com.

Signals from the Federal Reserve that it is ready to provide more stimulus to the economy to ward off a double-dip recession have been a major factor, as has a run of data suggesting that while the economy is continuing to recover at a slow pace, it is recovering nonetheless.

Still, Roberts and others said markets are also looking at Washington and liking what they see. Take the question of the George W. Bush tax cuts, the No. 1 policy debate in Washington for the last month.

Congress will take no action to extend any of those cuts before leaving town to campaign this week, but investors seem increasingly confident that all of the tax rates will be extended into next year and beyond.

“I think [Wall] Street is paying attention to letters from Blue Dogs and others about extending all of the rates,” said Brian Gardner, an analyst with Keefe, Bruyette and Woods.

Democrats are all over the map on the Bush tax cuts.

President Obama and Speaker Nancy Pelosi (D-Calif.) want to extend tax rates for the middle class while letting rates rise on individual income above $200,000 and family income above $250,000.

Centrist Democrats in both the Senate and House argue all of the tax rates should be extended for a year or two. They are joined by economists such as Moody’s Analytics chief economist Mark Zandi, who argues any tax increase now could compromise the recovery.

As The Hill’s Alexander Bolton reported Tuesday, still other Democrats argue an extension of any of the Bush tax cuts, including those on the middle class, should be temporary given the budget deficit.

While Wall Street rallies, corporate America is still sitting on a ton of cash and is much less certain about the future of the tax rates.

Ivan Seidenberg, chairman of the Business Roundtable and chairman and CEO of Verizon Communications, told reporters on a Tuesday conference call about the Roundtable’s economic outlook survey of CEOs that found the future of the tax cuts is “front and center” for business.

Seidenberg said business CEOs are generally cautious about the economy, in part because of concerns that the Obama administration and Congress will raise taxes on businesses and individuals. He also mentioned new regulations from the Wall Street and healthcare reform bills that continue to create uncertainties for businesses.

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“I think what you call politics, we call costs,” Seidenberg said in response to a question about the role politics is playing in business skepticism about the economy.

“I think the uncertainty is affecting the growth of the economy,” he added.

Overall, the outlook from business was cautious but positive in the Business Roundtable survey.

Sixty-six percent of the CEOs said they expect their sales to increase in the next six months, down from 79 percent in the previous quarter.

Forty-nine percent said they expected capital purchases to increase, and only 6 percent expected those purchases to drop. Investments by business in technology and capital improvements could be a significant spark for the economy.

Markets rallied again Tuesday, as the S&P closed at 1,147.7, up 5.54 points for the day. The S&P has danced within a range of 1,010 to 1,170 for much of the summer. “We’re alternating between euphoria and despair,” said Roberts.

If the market rises above 1,200, it will be difficult to downplay the role of politics. But no one on Wall Street can be certain whether that will happen.

“We’re getting toward the upper limit of that range,” said Gardner. “There’s a lot of different views on whether we’ll stay in that range or break out of it.”

All of this should be good news for President Obama. The stock market is a leading economic indicator, so a rally in September could point to a stronger economy next January or February.

But the rally appears to be providing little if any political help for Democrats struggling against a difficult midterm tide.

Unemployment is 9.6 percent and could rise in September’s report. And while the September rally is nice, it won’t make too many people who suffered through the housing and financial crises whole again.

Few Democrats are even talking about the surge, possibly for fear that the rally could end.

“These are nice rallies, but keep in mind, we were above 1,500,” Gardner said.Ian Swanson is the news editor at The Hill.