Judging from the recent moves of the FTSE100 and the S&P 500, investors don't really care whether governments take a Keynesian approach to their economies or cut spending in an effort to reduce budget deficits.
In the U.K., where the coalition government has just announced sweeping cuts to services, including upkeep for the Queen, the FTSE 100 has gained 19.8 per cent since its near-term trough in the summer. By comparison, the S&P 500 has gained 15.4 per cent over a similar period, even though the government and the central bank are still trying to stimulate the economy.
Granted, these two indexes contain the stocks of some impressively international companies, whose sales are not completely dependent upon the economic health of their home bases. Still, it is interesting to see that blue-chip stocks are taking a rather agnostic approach to two very different economic pursuits.
In the U.K., where the 2010 budget deficit is expected to reach 12 per cent of the country's gross domestic product, the government announced cuts totalling the equivalent of $127-billion (U.S.) over four years, leading to the elimination of nearly half a million jobs.
The U.S. is taking the opposite approach, and is in fact warning that severe budget cuts could harm the global economic recovery - since cuts put more pressure on unemployment levels and consumer confidence. According to the Wall Street Journal, U.S. Treasury Secretary Timothy Geithner had this to say about the U.K.'s approach: "I think that it would be a mistake for us here in the U.S. to shift too early toward substantial restraint on the fiscal side. Our goal is to lock in a more credible fiscal path over the next three to five years."
Meanwhile, investors are apparently pleased that the Federal Reserve is seriously contemplating stimulating the economy with additional quantitative easing - essentially printing money to raise the inflation rate and keep borrowing costs low.
It is hard to believe that both approaches can work. However, recent moves by stocks suggest that investors are entertaining such a belief.