While next month's congressional elections are a distant thought for many investors, Washington's economic policy paralysis will continue whatever the results, says Mohamed El-Erian, former CEO of Pimco.
"Regardless of the election outcome, there are only limited prospects for bold economic leadership out of Capitol Hill," he writes in the Financial Times
"The main question is not whether the mid-terms will change the gridlock in Washington that undermines economic growth, accentuates inequalities and holds back prosperity. It is whether companies and individuals can decouple even more forcefully from yet another do-little Congress."
The focus of many political pundits is whether Republicans will pick up the six Senate seats they need to gain control of the body. Real Clear Politics rates seven races as likely or leaning Democratic, nine as toss-ups and four as likely or leaning Republican.
If Democrats maintain control of the Senate, the status quo will rule, El-Erian says. "Virtually no meaningful economic legislation gets passed, and Congress’s popularity hovers around record lows."
If Republicans take over, the gulf between Congress and the White House might even widen, he writes, as they "shift their attention to the prospects for gaining control of the White House in the 2016 presidential elections."
"In sum, there is little chance of change in the polarization and dysfunction paralyzing Congress," El-Erian notes.
"For stock markets to continue to prosper, the private sector would have to decouple even more from Washington. And such decoupling would need to expand well beyond the current focus on financial engineering and less productive deployment of idle cash."
As for the stock market, it has risen historically both in advance of and following mid-term elections, according to Robert Doll, chief equity strategist for Nuveen Asset Management.
"Since 1930, the S&P 500 index performed significantly better on average in October, November and December than it did earlier in the year during mid-term election years," he writes in Barron's
. "This effect also has tended to last into the following year."
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