NEW YORK ( TheStreet) -- The midterm elections of 2014 are 20 months away -- an eternity in politics. But for capital markets, the midterms already matter now.
Democrats seeking to keep their Senate majority will only mostly moderate from here -- creating gridlock on major new legislation -- an additional positive factor for stocks as the risk of extreme legislation dissipates still more.
Some investors fear gridlock means nothing can happen, but that's not so. It means less extreme things can happen. Look at major legislation so far in 2013. It's been mostly as-expected continuing resolutions and extensions of the status quo. The fiscal cliff deal mostly made existing tax brackets permanent. The sequestration wasn't new; it was over a year in the making. (And, in fact, total government spending will rise in 2013). Sweeping legislation is the stuff of a single party wielding either outsized power or tremendous powers of persuasion. We left that world back in 2010.
And Democrats in the Senate know, if they want to keep not just their majority but their jobs, more moderation must be the name of the game. There are signs of it already. Democrats haven't been the most uniformly enthusiastic supporters of the Keystone XL pipeline (which would carry oil from Canadian oil sands and North Dakota's Bakken Shale to Gulf Coast refineries). On paper, the pipeline seems like a bipartisan win-win-win. It's popular (according to some polls, 70% of registered voters support it). It creates jobs. It should alleviate some energy production costs. And politicians on both sides enthusiastically support reducing American reliance on oil from despotic regimes.But since, as of yet, cars can't run on happy thoughts, there's always the NIMBY issue which tends to affect both sides equally. And the environmental lobby is small, but powerful, and leans heavily Democrat. Hence, in past votes, the pipeline has fallen well short of a filibuster-proof 60 "yeas." But in an amendment to the Senate budget last week, 17 Democrats joined every Republican in giving the full pipeline a green light, with many of those 17 either up for election in 2014, from traditionally red states or both.