Editors’ Note: MarketMinder Europe is politically agnostic, preferring no party nor any politician. We assess political developments for their potential economic and market impact only.

The next US and UK elections may be a year or so away, but the political scene in both countries is anything but quiet. UK political commentators are buzzing over former Prime Minister David Cameron’s return to frontline politics and the Conservative Party’s deepening rift—and speculating about what it all means for the next election (due by January 2025) and, by extension, future economic policy. Across the pond, the US Congress is trying to pass a government funding bill in time to avoid a partial government shutdown, and a high-profile Democratic senator’s decision not to run for re-election has tongues wagging. We think there are some interesting nuggets for investors to glean from all three, so let us investigate!

The US government shutdown countdown ticks down. Again.

Funny thing about kicking the can down the road: Eventually you reach it and must either kick it again or deal with it. That is the position US Congress finds itself in now, with Friday’s deadline to extend government funding and avoid a partial shutdown rapidly approaching. As we write late Tuesday, it appears they are making some progress, but a deal isn’t a sure thing. New House of Representatives Speaker Mike Johnson is trying to bridge disparate Republican factions by pushing a two-tiered funding bill that would extend some programs to January and others to February in hopes of tackling deeper funding divides piecemeal as those deadlines arrive.^[i] The House passed this measure on Tuesday, but Johnson relied heavily on votes from the opposition Democrats to get it across the finish line—a sign the ongoing conflict in his party hasn’t died down. Now the measure heads to the Senate, where both parties’ leaders have signalled tentative support but passage isn’t guaranteed. Historically, Congress has always reached a deal at some point, whether at the deadline or a few days or weeks after. But even if the current bill passes in time and President Joe Biden signs it, we probably get only a temporary reprieve from the brinksmanship since Congress would still need to hash out funding for the full fiscal year after the holidays.

So here is a friendly reminder: No shutdown ever caused a US recession or bear market.^[ii] Those occurring during downturns started after said downturns were well underway.^[iii] Returns may wobble in the run up to a shutdown as uncertainty spikes, but our research shows stocks usually bounce quickly. In our view, the associated warnings of trouble are part of stocks proverbial wall of worry, creating plenty of opportunity for positive surprise to lift stocks.

Senator Joe Manchin makes a big move.

It is official: Democratic West Virginia Senator Joe Manchin won’t run for re-election in November.^[iv] Manchin, a long-serving senator, has long been known for his centrism and willingness to buck Democratic Party leadership, and his was the key vote on Biden’s flagship economic bills last year. Yet the Senate isn’t getting much notice in the commentary on his pending departure. Instead, publications we follow are most focussed on the implications for the US presidential race, as Manchin’s recent op-ed announcing his decision strongly hinted at plans to run on the non-partisan No Labels ticket—which would fulfil long-running rumours.^[v] Our suggestion? Tune all that out. Nearly a year from Election Day, and with question marks over both parties’ eventual nominees, we think it is beyond premature to guess at how a theoretical Manchin ticket, Jill Stein and Robert F. Kennedy, Jr. will siphon votes from the main parties and how that might affect the Electoral College tally.

In our view, the Senate implications are a little more clear. Given West Virginia has voted for the Republican candidate in every election this century—and by an increasingly wide margin—we think it seems quite likely that Manchin’s exit means the Republicans will pick up the seat.^[vi] This is based on structural factors, of course—candidates and campaigns matter. But West Virginia’s other senator, Shelley Capito, is a Republican, and conventional wisdom says Manchin stayed in office only because he was willing to defy Democratic leadership to champion his constituents’ interests. In our view, a more partisan candidate likely stands a much lower chance of winning (absent campaign wildcards).

This could put the Democrats’ majority, to the extent you can even call it a majority since it depends on a vice presidential tiebreak, in question. Democrats already had slightly more seats to defend in GOP-leaning states next year, giving Republicans a structural edge. Now, more seats up for grabs doesn’t necessarily predict a shift, in our view, since incumbents can be difficult to beat.^[vii] But Manchin’s move takes one such incumbent off the table, which we think raises the likelihood of more partisan gridlock if the Democratic Party retains the White House (be it in the form of incumbent President Biden or some other candidate). Yet based on the seats up for election next year, the Congressional vote also looks close enough to us that a new Republican president would also face tough gridlock, especially with such deep intraparty divisions likely to persist, in our view. Either way, we think it means Congressional gridlock will probably be a strong counterpoint to whatever big claims commentators make about the presidency next year, be they fearful or cheerful.

Cameron makes a comeback.

Speaking of intraparty divides, Sunak reshuffled his cabinet again Monday, creating a sizable political earthquake in the process. His decision to sack Home Secretary Suella Braverman following her decision to publish an unapproved newspaper column last week surprised few if any political observers.^[viii] Commentators we follow have been debating over whether it was politically wise, given her broad support amongst the Conservative Party’s grassroots and the Tories’ need to maximise turnout at the next election, but we think the writing was on the wall.

What did surprise political watchers was the rest of the reshuffle—particularly Foreign Secretary James Cleverly’s move to the Home Office and the appointment of Cameron to replace him after more than seven years out of frontline politics.^[ix] In the aftermath, several junior ministers resigned, and Braverman caused an earthquake of her own with her formal response to Sunak. There is now a huge discussion over the potential implications. Among the questions commentators we are follow are examining: Is Cameron’s return good for the Tories’ electoral prospects? Do voters remember him fondly enough? Tactically, is it on par with Tony Blair’s return to Labour Party strategising? Or does it signal a more centrist, big-government turn that will further alienate traditional Conservative voters? Will the party split formally, with Braverman and others leading a breakaway group? And how will the party’s apparent civil war affect its electoral chances?

In our view, the answer to those and all other questions seems like a giant who knows. What does seem clear to us, however, is that political gridlock will persist through the next election at least, with Cameron’s return therefore extending the status quo. The Conservatives were deeply divided internally before he reclaimed a frontbench seat, and they are deeply divided now. The cabinet may be more cohesive and centrist, but backbenchers have clout and many have expressed displeasure with government policy.^[x] With Labour riding high in the polls, we think it all creates a big incentive not to rock the boat.^[xi] So it seems likely to us Westminster will feature a lot of talk and very little action, starting with the Autumn Statement later this month.

Gridlock tends to annoys people, and we understand why it would. Why pay politicians to bicker endlessly without doing anything? But in our view, stocks see it differently. For them, an active government usually means more risk and more uncertainty, which can delay investment as risk-averse businesses wait to see who the winners and losers will be. Our research shows this negative sentiment can weigh on stocks, though politics are just one market driver, in our view. Gridlock can be a powerful antidote, zapping that uncertainty and giving businesses the clarity they need to plan, calculate risk and return, and invest. Even if people never consciously see it as a positive, we think stocks will often see the reduced legislative risk and rise in relief.

In our view, the UK looks set to keep this bullish gridlock through 2024 at least, paralleling the US gridlock that tends to dominate in election years. On the political front at least, we think tailwinds are likely to remain at stocks’ back throughout the developed world.