There’s no shortage of evidence that for all the attention the stock market seems to pay to elections, ultimately it doesn’t matter who is in the White House. Yet while investors have long enjoyed some measure of political agnosticism that may no longer be an option.
Of course, it’s overly glib to say that politics never mattered to the
Prospects for individual sectors can be impacted by Changes—or lack thereof—to big entitlement programs or policy shifts. The same is true of economic slumps that can be exacerbated by the government’s response.
Yet there are plenty of examples that show the irrelevancy of politics: For example, the market is said to crave certainty and gridlock—until suddenly it doesn’t. And history shows that there are fairly reliable patterns—albeit with exceptions—across presidential terms, regardless of party.
Nonetheless, as the pandemic illustrated, there are some major global events that make it difficult to ignore what policymakers are doing.
That’s more likely to be the norm going forward, warns Morgan Stanley Strategist Michael Zezas. Beyond Covid, he notes that factors from the Ukraine War to the U.S.-China trade spat “have demonstrated that policy choices and reactions have real and increasingly regular impact on the trajectory of the economy and markets.”
It’s not easy to predict the next Black Swan event like the pandemic, but he argues you don’t need a crystal ball to see that two major global transitions. The first is the move away from a model of global commerce centered on the U.S. The second is the attempt to rein in carbon and limit climate change. Both will necessarily be heavily influenced by politics.
Nor do you need to look that far out for multi-year trends to see how politics is making itself felt on markets: Just look at the debt ceiling. It’s easy to shrug. While the standoff does put the U.S. dangerously close to financial Armageddon, it’s an abyss the country has stared into multiple times in the past. Repeated exposure to danger, however, doesn’t diminish its potential pain and the market’s blasé response doesn’t mean that there’s no need to worry.
In fact, Zezas argues that “the policy-savvy investor likely notices some key differences that make the current situation look more like the difficult negotiation that coincided with the S&P 500 dropping 17% in late July 2011.”
As was the case then, a slim Republican minority in the House of Representatives is demanding greater government austerity. Moreover, this “brinkmanship dynamic has no clear endgame and keeps austerity a meaningful possibility at a time when our economists expect GDP to be slowing considerably, as it also was in 2011,” Zezas writes.
We’ve noted before that there’s no guarantee that 2023’s early rally won’t fizzle. Mao Zedong isn’t someone often quoted when it comes to free markets, but he once said that politics is war without bloodshed. He never said anything about its ability to spill red ink.
Write to Teresa Rivas at firstname.lastname@example.org