Investors May Thank Washington for Gridlock

NEW YORK ( TheStreet) -- The markets have been fixated on the political standoff in Washington, D.C. Through Friday, the S&P 500 was down in nine of its last 12 sessions.

The uncertainty, especially over the debt ceiling and possible default, has made investors hesitant to make longer-term commitments with their investment funds. Nevertheless, the data from the private sector, especially of late, have been much stronger than earlier in the year.

Consider:

The manufacturing sector is hot. The Institute for Supply Management (ISM) manufacturing index was 56.2 in September, the highest in nearly 2.5 years. In the U.S., we are seeing a manufacturing renaissance as labor cost increases in China and much of Asia are running in excess of 10% annually.

As an example of what is going on in manufacturing, 9 of GM's 17 production plans are operating flat out on an around the clock (3 shift) schedule. In 2008, at the last auto peak, only 3 of the then 20 plants were operating at full capacity. In August, auto sales were 16.1 million units (SAAR - seasonally adjusted annual rate), a level not seen since before the financial crisis. Sales fell back in September to 15.3 million units (SAAR) but only because the Labor Day holiday was on Sept. 2 and some weekend sales were pulled into the August numbers. The average of the two months, 15.7 million units (SAAR) isn't anything to sneer at.

In the labor markets, employers are having a hard time finding qualified applicants. This is quite a different market than it was even two years ago. First-time filers for unemployment insurance are at levels not seen since 2007, and this particular economic series has a high inverse correlation with stock prices, i.e., when claims fall, stock prices rise.

Voluntary quits are also up significantly indicating that current employees are getting more confident that they can find new employment. Despite the secular downtrend in the labor force participation rate, a labor shortage is developing.

While suffering a setback due to higher mortgage rates this summer, the housing market still suffers from a lack of supply. This isn't surprising given that we have had only minimal new housing construction for the past half decade while population growth has continued. As a result, there has been a double-digit rise in home values over the past 12 months, which makes middle class homeowners more confident and more willing to spend and take on debt. We see this in the consumer sentiment surveys, in the growth of credit card debt and in new auto financings

The U.S. economy is mainly service based, so the ISM non-manufacturing index is an important indicator of economic health. In August, that index hit 62.2, the highest level since early 2011, a time when GDP was expanding faster than 3%. Not to get too excited, the index fell back to 55.1 in September. Nevertheless, that is still a healthy result. By definition, anything over 50.0 signals growth.

The worry over China (which embodies Australia, Canada, and others which supply China much of its raw materials) now seems overdone. While economic growth is much lower than in the past decade, 7.5% is still much faster than anything the mature economies could hope for. There was no "hard landing" there, and indications are that growth has resumed. This is positive for exports and international large cap companies. In addition, Europe's economy appears to have bottomed.

Meanwhile, the Federal Reserve and other central banks have kept the monetary spigots open and, because of the so-called "crisis" issues in Washington, D.C., it seems unlikely that Bernanke will begin to "taper" money before year's end. In addition, and just as an historical note, in the post-WWII era, every recession has been preceded by a significant "tightening" of monetary policy (i.e., yield curve inversion where short-term rates are higher than long-term ones).

As indicated above, it appears we are a long way from that. Normally, when the economy grows and monetary policy is still easy, stock prices rise.

Don't get me wrong. The long-term outlook is still clouded. Middle East tensions persist, terrorism, led by Al-Qaeda, is not dead, and U.S. influence in the world is waning. In addition, the long-term struggle with debt, its costs, and entitlements in the U.S. and Europe still hasn't been dealt with. Nor has risk in the financial system been removed. This is true for the U.S., but especially true for Europe.

But, if the debt ceiling is raised without a U.S. default (which is the highly likely scenario), markets will have a relief rally, and, at least for the short-term, concerns over those nasty long-term issues will be put on the back burner. Remember, rising markets often climb a "wall of worry." Perhaps, the political antics now playing out in Washington, D.C., especially if they push the default issue to the precipice, will ultimately give investors a buying opportunity in the equity markets.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Robert Barone is a partner, economist and portfolio manager at Universal Value Advisors, an investment advisory firm in Reno, NV.

He previously held positions as an economist for Cleveland Trust Company and as professor of finance at the University of Nevada. During his tenure at Comstock Bancorp in 1996 he became a Director of the Federal Home Loan Bank of San Francisco, serving as its Chair in 2004.

Barone also served as Director of AAA of Northern California, Nevada and Utah and a Director of its associated insurance company. He currently serves on AAA's Finance and Investment Committee. Along with his son Joshua, he founded Adagio Trust Company in 2000. Barone received a Ph.D. in Economics from Georgetown University.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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