A Historically Inactive Congress Is Getting More Gridlocked

Editors’ Note: MarketMinder is intentionally non-partisan. We prefer no party nor any politician and assess developments for their economic and market impact only.

Sooooo … do we call this a shutdown? The deadline to prevent budget disruptions from forcing a partial closure of the US government was 12:01 AM EST on Saturday March 23. The House did its part, passing the necessary legislation Friday afternoon. But the Senate didn’t get its ayes lined up until just after 2 AM Saturday, and President Joe Biden signed the bill at a more civilized hour later that morning. The last time this happened, history recorded it as a shutdown that didn’t actually shut anything down. This time, the narrative seems to be, shutdown averted! That debate is, of course, academic. But the real story here, in our view, is gridlock, which is now ratcheting up even more—likely much to stocks’ delight.

The shutdown deal was mostly a foregone conclusion, given the bad optics of letting a shutdown happen in an election year. Too much political risk for lawmakers on both sides of the aisle, whose primary goal is always winning re-election. Shutdown legislation is the rare exception to the general rule that doing nothing is the best way to avoid alienating voters.

Now the general rule looks set to regain its Congressional stranglehold. For one, the likelihood of anything major and remotely contentious passing rounds to zero, given Congress is split. Two, each chamber has a razor-thin majority. The Senate is de facto 51 – 49, with the Democrats holding the slight majority as the three independents caucus with them either officially or in practice. Meanwhile, the Republicans had a 219 – 213 edge in the House as of Friday.^[i] But not now. Representative Ken Buck (R-CO) left his post effective Friday. Additionally, Rep. Mike Gallagher (R-WI) announced he will move up his previously announced resignation, leaving his seat on April 19. That will put the edge at 217 – 213, which means just two Republicans voting with the Democrats would be enough to block a bill.

Given the tensions and gridlock within the Republican party, we doubt much of anything will get through. This Congress was already on course to be modern history’s least active based on the number of bills enacted, and this inactivity looks likely to last. While the government funding legislation passed 286 – 134, most of those 134 nays were Republicans, and the majority of the 286 ayes were Democrats. The whole saga has reopened the same wounds that led to former Speaker Kevin McCarthy’s ouster last October, pitting new Speaker Mike Johnson against several members of his own party. We won’t get into the specifics, as it is all political theater, but suffice it to say this sideshow looks likely to dominate for the foreseeable future as all involved pivot to posturing for November.

For humans who find the shouting and gamesmanship grating, this is bad news. For stocks, which tend to be deaf and cold to such things, it is very, very good news. Stocks don’t care about political parties, personalities or who says what on social media. They don’t care about viral floor speeches and quotes taken out of context—nor any of the other things hashed and rehashed endlessly in certain corners of the reactionary news world. They care, simply, about policies. As in, is Congress doing anything big and radical that could redraw property rights, change the rules of commerce or otherwise interfere with the potential return on a new investment? Is there a high likelihood of new legislation creating winners and losers? When we have extreme gridlock like the present, the answer is as close to a blanket no as possible.

That no is a big fat yes for markets. It gives businesses and investors the clarity they crave, freeing them to deploy capital as they see fit. It removes the uncertainty overhang that might otherwise weigh on risk taking. It omits the drag that comes when legislation’s losers feel the pain over twice as much as the bill’s beneficiaries enjoy their win. And it all manifests in markets romping higher without legislative risk standing in their way.

Headlines will tell you AI hype and rate cut hopes are the driving forces behind 2024’s stock returns, the reasons why the S&P 500 is already at double digits on the year before March is over.^[ii] Yet the reality is stocks are doing what they pretty much always do in the latter half of a president’s term, after midterms have boosted gridlock. They are riding a wave of a do-nothing Congress doing nothing to obstruct them. Political risk isn’t absent, given the election’s lingering wildcards and the fact that a lot of rulemaking happens outside Congress, in the regulatory state, these days. But Congressional gridlock is a powerful control on a big variable, and for stocks, it is happily one less thing to worry about.