The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Choose Your Poison

01/05/2021

Last year, the most common question was — how can the stock market be doing so well, when the economy is doing so badly?  The short answer, of course, is that the economy is focused on the present, while the stock market is focused on the future.  The object lesson is that, while the stock market and the economy are related, they are still very different.

The traditional thinking is that the stock market does best when our government is in gridlock, and history supports that conclusion.  Under gridlock, nothing big really happens, which makes it easier for businesses to plan effectively, and that’s true.  While gridlock is probably good for the stock market, that may not be good for the economy, especially when big things need to be done, such as increased infrastructure spending.

Most analysts believe that a long-term bull market on Wall Street is dependent on a growing vibrant underlying economy.  To give the economy some oxygen, we can increase taxes or increase debt.  Wall Street doesn’t like increases in tax.  Your grandchildren don’t like increased debt.

(The supply-side argument is that a tax decrease solves all problems, by growing the economy more rapidly.  Of course, there is some truth to that, but only some truth.)

If Democrats control government, we get infrastructure, along with higher debt.  If the Republicans control government, we get infrastructure with higher debt.  If we get gridlock, we get a higher stock market.  Choose your poison!

There is a biblical verse (ECCLESIASTES 3:4 KJV) that says there is a time for most everything, e.g., a time to be born, a time to die, a time to cry, a time to laugh and so forth.  So when is the time to eliminate gridlock and to make bold decisions once again?

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