Business

Wall Street loves gridlock. But gridlock isn't always great

Posted November 11, 2018 7:09 a.m. EST

— 1. Divided government: American drivers hate gridlock, but investors seem to love it, at least when it's slowing down the wheels of Congress.

Wall Street initially celebrated after the midterm election delivered divided government. The Dow soared 545 points Wednesday after Democrats won control of the House from the Republicans.

Investors, always the cynical bunch, figure Washington won't be able to mess things up with disruptive legislation (like a minimum wage hike) or by repealing laws that the markets like (see: massive corporate tax cuts).

Veteran traders even have a mantra for this thinking: gridlock is good. History generally backs it up. The stock market has performed just fine under a divided government. Recall that much of the bull market took place under President Barack Obama and a Republican-led Congress.

But Sam Stovall, chief investment strategist at CFRA Research, cautions that the S&P 500 has only gained an average of 3.5% in the 12 months after a midterm election that resulted in a split Congress with a Republican president. And more than a third of the time the market lost ground.

"Even though gridlock may be good, it ain't great, and investors would be wise to temper their enthusiasm for the year ahead," Stovall wrote in a report.

Extreme gridlock can lead to dysfunction. Recall the 2011 standoff between Obama and Republicans in Congress over raising the debt ceiling. That brinksmanship caused the unprecedented downgrade of America's credit rating by Standard & Poor's. The S&P 500 nearly plunged into a bear market.

Similar fights could erupt next year, except this time with the added element of President Donald Trump's unpredictability.

"Look for more late-night standoffs around spending plans, government shuts downs and threats to default," Christopher Smart, head of macroeconomic and geopolitical research at investment firm Barings, wrote to clients last week.

The government could face a shutdown on December 7, 2018, though that deadline may get pushed to 2019 when the new Congress is seated. The debt limit will go back into effect on March 1 and Goldman Sachs expects Congress will need to raise it by August to avoid a default.

"What better way for one party to extract concessions from the other than to put the full faith and credit of the United States at risk," Smart wrote.

The refrain on Wall Street will have to change at that point to something commuters can relate to: extreme gridlock stinks.

2. Retail earnings: Ahead of the make-or-break holiday shopping season, retail earnings reports next week include L Brands, Gap, Macy's, Nordstrom and Walmart.

Despite the retail doldrums, Nordstrom is having a blockbuster year. The stock is up 37% for the year because investors are thrilled with the posh chain's strong digital sales. The Seattle-based company is also seeing an uptick in sales to its nearly 400 stores. Nordstrom was once mulling a decision to go private and held on-and-off talks with the Nordstrom family, but discussions ended in March with no deal.

Macy's is also having a strong year: Its stock is up more than 40%. Although people are still shopping at the 160-year-old brand, investors are worried that momentum might be slowing.

3. Tech results: Nvidia, Cisco and Eventbrite report next week -- all three companies that are weathering a rough market for tech companies.

In particular, chip maker Nvidia is experiencing slowing growth. The company dropped 27% in October. It wasn't dinged by any particular bad news, but followed a broad sell-off of among chip makers. Rival AMD warned last month of slowing demand for its graphics processors and said revenue will continue to be below expectations.

4. The blues: Once-hot meal delivery kit company Blue Apron reports what's likely to be more disappointing earnings. The stock has lost 85% of its value since it went public in June 2017.

The company has tried turning its business model around by reducing head count, forming partnerships with celebrities and having its kits delivered via Walmart-owned Jet. Its stock has collapsed 70% year-to-date as it faces an onslaught of competition from Amazon, HelloFresh and grocery chains.

5. Coming this week:

Monday — Eventbrite (EB) earnings; Markets open for Veterans Day

Tuesday — Aramark (ARMK), L Brands (LB), Childrens Place (PLCE), Home Depot (HD) and Tyson Foods (TSN) earnings

Wednesday — Blue Apron (APRN), Progressive (PGR), Cisco Systems (CSCO), Gap (GPS), and Macy's (M) earnings; Inflation numbers for October

Thursday — Nvidia (NVDA), Nordstrom (JWN), Walmart (WMT), and Manchester United (MANU) earnings; October retail sales

Friday — Williams-Sonoma (WSM) earnings