U.S. Financial Markets rallied Tuesday on speculation that Republican Scott Brown would win the late Senator Ted Kennedy’s vacant seat. A Brown win could cause potential problems for Democrats and those in favor of President Obama’s health care plan. As a result, the health care index ($HCX) closed up 2.04% while the hospital index ($RXH) closed up only 0.61%. The hospital index opened lower, but traded higher throughout the day as the rest of the market rallied.
The markets began pricing the Republican win early in the trading session. The U.S. Dollar and equity markets rallied on the speculation that a Republican win in Massachusetts would help to bring Washington closer to normalcy. However, Brown’s victory may have some serious economic implications that many have not considered. Scott Brown’s victory implies less stimulus money, lower expected future inflation, and a reduced likelihood of a tax increase.
Brown’s victory reduced the likelihood of a tax increase which can explain much of today’s rally. The first two implications are related since a decrease in our current level of deficit spending will in turn decrease expected future inflation. However, lack of necessary stimulus could result in a serious problem. For the record, I disagree with deficit spending, particularly when the intent is to influence the business cycle. With this in mind, reducing or eliminating the current stimulus policy will cause us to fall into a Depression. The government cannot stop stimulating this economy without certainty that we are recovering. Notice I said CERTAINTY and RECOVERING.