It is hard to understand why Republican gains in Congress are leading to a jump on Wall Street: if we listen to their rhetoric, they are promising us fiscal stringency, hard-nosed policies towards those indebted and thereby not recovery (given the role both play in our economy) but further economic pain.
But maybe I listen (well, read) too much. Ronald Reagan ran as a fiscal conservative, deriding the deficits of Jimmy Carter; Bush II couldn’t complain about deficits because he inherited a surplus, but nevertheless paraded as a conservative. Those running for Congress did the same. Yet at least in terms of economic policy they were radical Keynesians, increasing the size of government. To take the more recent case, under Bush II every single department of the Federal government expanded, while he expanded welfare via the huge prescription drug supplement to Medicare). Yet both cut taxes rather than finding a means to pay for their profligacy.
Will things be better this time around? Or will we have a stalemate in Washington? – for better or (right now) for worse, Obama seems to be a real fiscal conservative (woe is us). So the impetus of Congress (or at least Republican congresses) to spend and spend [and not offset that with taxes] may go nowhere.
Of course we know that financial markets are efficient and thus incorporate knowledge of the future: about half the time when markets go up the performance of the economy proves better than the average forecast....now for you students in intro statistics, why is that somehow less than reassuring?