The stock market has reacted with a big yawn to the drama in Washington over the House of Representatives speakership.
Over the four trading sessions this week during which successive ballots have failed to decide the race, the S&P 500
is up less than 1%. This return is not significantly different than its average over all four-day periods in U.S. stock market history.
Many investors are surprised by the market’s lack of a reaction, but an analysis of U.S. stock market history suggests they shouldn’t be. Understanding that history can teach us valuable lessons about how the markets operate—and how not to be so reactive to the days news.
Since the birth of the United States in the early 1790s, there have been 14 speakerships before this year’s that took more than one ballot to decide. The stock market in those years did not perform significantly different than average. The same goes for the bond market. This is illustrated in the accompanying chart. Notice the absence of any overall pattern in the relationship between the stock and bond markets’ real (inflation-adjusted) returns and how many ballots it takes to determine who will be the House speaker.
To understand why the stock and bond markets have not reacted in any consistent way to difficult House speakership battles, recall that efficient markets at any given time will incorporate and therefore reflect all publicly known and economically relevant information. It’s when new information becomes known to the market that the markets typically rise or fall.
It seems plausible that investors aren’t learning anything particularly new or relevant from how long it’s taking the speakership race to get resolved. After all, we already knew that the political parties in the House of Representatives were close to being evenly split, that power would be fractured, and that no major legislation would get passed in the next two years. That’s essentially what we still know in the wake of this week’s extended battle for House speakership.
One comeback to my argument that I’ve received from some focuses on what this week’s speakership battle means for the battle to raise the federal government’s debt ceiling. It will need to be raised at some point in coming months, and if that doesn’t happen the federal government may have to default on its debt—with potentially disastrous repercussions. Some of the Republican representatives who are not supporting Kevin McCarthy’s bid to become speaker have indicated that they are willing to risk such a default to effect changes to the federal government’s budget.
That certainly seems scary. But, once again, one can argue that we already knew that the debt ceiling debate later this year would involve brinkmanship over the federal government’s finances. As early as mid-November, when it became clear that the Republicans would become the majority party in the House of Representatives, my colleague Robert Schroeder was warning about a “debt ceiling brawl” in 2023.
In any case, you should know that the stock market has largely shrugged off past debt-ceiling battles in Congress. Consider the 21 government shutdowns that have occurred over the last five decades. The S&P 500 on average gained 0.3% during those shutdowns, which lasted an average of nine calendar days. A 0.3% return over a nine-day period is not significantly different than the average return across all other periods of similar length in U.S. market history.
The bottom line? When you read the daily news, ask yourself whether it reflects any development that is significantly different than what the market already new. And even if the answer to this initial question is “yes,” also ask yourself how economically relevant it is. You’ll find that, in a large majority of cases, the answer is “no” to at least one of these two questions—as it appears to be currently with the drama in the House of Representatives over who will be speaker.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org.