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Gridlock = Gridlock

In 1792, some “wannabe” stock traders gathered under a buttonwood tree on Wall Street to develop some agreement to trade stocks and the New York Stock Exchange was born.  Today, over twenty trillion dollars of stocks trade there and is the biggest in the world.  It has become synonymous with “the market.”

Initially, it merely traded existing stocks.  Later, it allowed new companies to sell stocks or initial public offerings.  (Eventually, economists noticed it was often a predictor of economic activity, usually six-to-nine months.)

Warren Buffett’s mentor was Benjamin Graham, who famously said the market was a voting machine in the short run and weighing machine in the long run.  He meant that popular stocks rose in value and unpopular stocks fell in value in the short run, while the market carefully assesses the substance of each stock in the long run.  But, what would he say when all stocks become popular, like they are today?  I suspect he would say . . . be patient, they will stop rising in the short run and may even fall in the long run.

It is hard to discuss today’s market without looking through the prism of politics.  There is a litmus test of whether you are willing to give President Trump the credit for the market rally or not.  I don’t see it as that simple.

First, the market rallied with the death of gridlock.  Then, the market rallied, when analysts re-crunched 2017 and 2018 earnings with the lower corporate tax rate, increased infrastructure spending, and increased defense spending.  Now, the market is in rally-mode because President Trump finally acted presidential in his “SOTU” speech, but I suspect this will be the final and weakest leg in the bull market we’ve enjoyed since November.

At some point soon, the President will run up against the faceless wall of 485 egos in Congress.  My concern is that the new gridlock will not be between Republicans and Democrats but between Trump and Republicans.  Still, gridlock is gridlock.

Will the new gridlock bring us back down to pre-election levels?  I doubt that, but current stock prices are too high for any gridlock.  The new gridlock in Washington will be reflected on Wall Street in New York.