The Dow Jones Industrial Average hit a record high Thursday. Is the surge odd, given that the federal government’s forced spending cuts are now a reality? Could it be due to other world markets not rebounding quickly? Will the drop in the market that has occurred Friday and Monday continue, or will it rebound?
David Leblang, J. Wilson Newman Professor of Governance and chair of the Woodrow Wilson Department of Politics in the College of Arts & Sciences and professor of politics and public policy in the Batten School of Leadership and Public Policy, says the stock market’s stellar performance of late is due in part to governmental gridlock.
“Financial markets do best during periods of divided government – or gridlock – because financial market participants do not have to worry about irrational policy enactments that may alter fiscal or monetary policy and/or the regulatory environment,” said Leblang, who noted that the run-up in stock prices is consistent with the conclusions reached in his 2006 Cambridge University Press book, “Pricing Politics: Democratic Politics and Financial Markets.”
Herman Schwartz, a politics professor and an expert on global political economy, said, “The stock market is high because profits are high and have been rising as firms cut their wage bill and headcount while maintaining the same level of output.”
But he added that “soft demand in most world markets bodes ill for the market’s new highs.”
A related media tipsheet on the U.S. stock market is here.