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Gridlock is good for stocks, right? Apparently not when investors are pining for promised corporate tax cuts and infrastructure spending.
Geopolitical fears have been front and center over the past week as U.S. stock indexes have experienced modest weakness and haven assets from gold to Treasurys to the Japanese yen have found strong demand. But domestic worries aren’t far out of mind, according to the chart below from the Institute for International Finance:
The chart tracks the Philadelphia Fed’s gauge of partisan-conflict fears. Not all of the sources of domestic worry stem from admittedly high tensions between Republicans and Democrats.
The IIF, a trade group representing the world’s largest banks, observes in a Friday note that “much hinges on U.S. tax reforms/cuts, so the news that the administration will be going back to the drawing board—meaning that [Treasury] Secretary [Steven] Mnuchin’s ambitious August deadline for a tax code overhaul plan is unlikely to be reached—is disappointing for growth stocks.”
In an interview with The Wall Street Journal published Wednesday, President Donald Trump insisted that health care must be dealt with before moving on to his tax overhaul.
Meanwhile, worries that conservative Republicans could block any substantial infrastructure-spending plan have sapped momentum in construction and engineering stocks, which have retreated 10% from their late-January peak, the IIF notes.
As for that oft-repeated notion that gridlock is good for stocks, historical data suggests it’s more than a little suspect.
Regardless, there wasn’t supposed to be gridlock in Washington with a Republican in the White House and the party in control of the House and Senate. But the implosion of a Trump-backed health-care plan in March has raised questions about the timing and scope of plans for corporate tax cuts, infrastructure spending and other pro-business measures that helped extend a stock-market rally after Election Day.
Stocks have been trading sideways since late February.
The S&P 500 SPX, -0.68% fell 1.1% in a holiday-shortened week, extending a losing streak to a third consecutive session on Thursday. Meanwhile, the CBOE Volatility Index VIX, +1.20% known as Wall Street’s “fear gauge,” rose to a level last seen just after Nov. 8, though investors are questioning just how reliable a measure of market worries the index is right now given a weakening of cross-asset correlations since the beginning of the year.