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Everyone on Wall Street seems to agree that

gridlock is good for the markets. But you'd never know going by the last couple days.

The major indices took a hammering Wednesday and plunged again Thursday, falling sharply after the Gore campaign said it would support legal action over the Florida voting muddle. The

Dow Jones Industrial Average

dropped 1.9%, while the

S&P 500

gave up 2.2% and the

Nasdaq Composite

index slipped 3.4%.

The relief rally that many observers were expecting at the close of elections has been forestalled until some unknown future date. The problem isn't in the election results, explains

Merrill Lynch

equity strategist Chris Callies. "Not knowing who holds the highest office in the land has probably prevented investors from buying when they otherwise would," she explains. "The market needs buyers to go up."

Nor is it necessarily a matter of investors knowing if they

should

buy or not, but

what

they should buy. It's thought that the regulators appointed in a Bush presidency would take a much softer tack against the pharmaceutical and tobacco industries, to say nothing of

Microsoft

(MSFT) - Get Report

. It's also believed that, because of greater tax cuts, a Bush presidency would result in higher bond yields and interest rates. That, too, has important sectoral implications.

Bush League?
It's certainty investors crave, apparently

"If anything," says

W.R. Hambrecht

head of listed trading Todd Clark of the election uncertainty, "it prevents you from making big sector bets. As a result, light selling can really skew things." That's exactly what was going on yesterday, thinks Clark, when the Nasdaq shed 5.4% in light volume.

Dragging

It has become increasingly unlikely that the election results will be resolved in short order. If the Florida recount goes Bush's way, it seems likely it will be disputed. A federal judge has scheduled an emergency hearing to address allegations that a confusing ballot in Palm Beach County essentially deprived citizens of their right to vote, and more suits are in the offing. A close decision either way, and it will be necessary to wait for overseas absentee ballots to come in. A Gore win, and it seems likely that the Bush camp will demand recounts in states that Gore narrowly won. Then, of course, there's the possibility of a second recount in Florida, which would have to be done

by hand

, and the possibility of Palm Beach voters recasting their votes. And on and on it goes.

This doesn't look like it's going to end anytime soon.

"How many times do processes end earlier than you expect?" asks

ISI

political strategist Tom Gallagher. "I don't think it's going be a matter of days. The only guidance I've got is that Dec. 18 is when the Electoral College votes and that the lawyers will want to finish up before that."

Paper Tigers

There is an old saw on Wall Street that investors should buy to the sound of cannons. Perhaps, with teams of lawyers converging on Florida, we could update that to buy to the sound of briefcases. The move up that could come with the conclusion of this interesting little event in our nation's history may leave a lot of investors wishing they'd used it as a buying opportunity. "I wouldn't be surprised if the resolution of this starts the market off on a nice little rally," says Callies.

But the problem, says Clark, is that things could get worse before they get better. "What's going to end up happening is people are going to get dragged down by this thing," he says.

And inevitably, as the whole affair takes on the characteristics of a low-speed chase on a California freeway, people will find things to worry about. They'll talk about how the U.S. political process has been marginalized. They'll talk about how U.S. stature abroad has been lessened, giving succor to enemies like

Saddam Hussein

. They'll talk about how foreign investors will have less confidence in our markets, and will begin to draw money away. And so it goes.

"I can't imagine the clouds are going to lift soon," says Clark. "I was born, but I wasn't born yesterday."