The markets focus is narrow.
Editor’s Note: MarketMinder is politically agnostic. We do not favor any politician or any political party in any country, and only evaluate developments for their potential economic and market impact.
Here’s the thing about politics and stocks: If you don’t check yourself, it’s very, very easy to obsess over news that seems seismic from a societal perspective, but doesn’t mean much (if anything ) for stock returns.
We say this because political news dominates today’s headlines globally, and pundits are trying (and, in our opinion, failing) to extract economic implications from it all. In Scotland, for example, former First Minister (and former head of the Scottish National Party) Nicola Sturgeon was arrested over the weekend along with a simmering scandal over the alleged misuse of party funds. She was released without charge pending further investigation, but that has not stopped some corners of the British press from imagining a new day when the SNP is out of the Scottish government and a new administration can improve the country’s economic competitiveness, lifting the entire UK economy in the process of. Never mind that another nationalist party has emerged and it is far from certain that a party running on a pro-business platform will win the next Scottish election, which is not due for nearly three years, or even and all could enact any meaningful and well-crafted reform.
This is not an isolated case. The news of former Italian Prime Minister Silvio Berlusconi’s death not only brought some of the most salacious political obituaries we’ve ever had the misfortune to read, but also led to speculation that Berlusconi only supported the centre-right Forza Italia party. Some now argue that his death will allow Prime Minister Giorgia Meloni to bolster the ranks of her Brothers of Italy party in Parliament, as she could absorb defectors from Forza Italia. Perhaps, but people switching from one party within a coalition to another does not change the balance of power, nor the stagnation inherent in multi-party administrations like Italy’s. To us, the speculation looks like an attempt to argue that Meloni’s moderation was temporary, and now all the radical legislation that people feared when he first took office will finally be put into place: the latest iteration of Italy’s fears dating back to at least 2010. looks a lot like a stretch in a three-party coalition like his. Competing interests have not disappeared, they just have a less visible figure with Berlusconi.
And then we have the second impeachment of former President Trump and the ongoing House investigation into an alleged influence peddling scheme involving President Biden, which have turned the US political outrage industry up to 11 and side of the corridor. We don’t need to tell you that every cable talker is talking about what this means for 2024. Never mind that we’re more than six months away from the primaries, with challengers in both parties still declaring and no debates yet. in books, much less in books. There will come a time when investors focus on 2024 and its implications for the stock market, which will mainly come down to whether this contest increases or decreases lock-in, and how that reality matches up to expectations. But with the primary races still vaguely taking shape and the long history of early polls reflecting name recognition more than odds, that time is not now.
If you care about this news from a personal or social point of view, that’s fine. If you’re really into sociological commentary on what George Soros’ passing the torch to his son might mean for this or that political cause, don’t mind. We’re not saying any of this is trivial. But basing investment decisions on what you think today’s political stories might mean for an election more than a year (or two or three) away is pure speculation. The problem is that markets don’t move in possibilities. They move in probabilities and how those probabilities relate to expectations. If you cannot assign probabilities and expectations are unclear, we believe you have no rational basis to buy or sell a stock.
Another risk: basing your decisions on things the market doesn’t care about and doesn’t value. Politics involves a wide variety of things, some of which have nothing to do with markets. On the one hand there are the developments that really affect the economy and the incentives to take risks and invest. This will generally include taxes, regulations and property rights. These are the things markets care about (albeit to varying degrees and often counterintuitively). On the other side are all the other things that might make some people happy and others’ blood boil, but don’t actually change the way the country does business. We classify all this as sociology. And stocks have a long, long, long history of yawning in sociology. It’s just not a market mover.
This is where the pitfalls materialize for investors. Politics is an emotional topic for many, and all too often that emotion can bleed into people’s investment decisions. We see it over and over again. Opinions about the sociological side of things lead people to draw conclusions about the economic side of things, usually based on feelings, feelings that do not match economic reality. Seeing a party do something you like at X number doesn’t mean their economic policies will be a massive positive surprise that will send stocks soaring. Likewise, seeing a party do something you hate on issue Y doesn’t mean their economic policies wreck markets.
It’s often much messier than that. Political parties and world leaders are notoriously pro- or anti-business. In most cases, neither is deserved, increasing the risks of basing your expectations on traditional political biases. French President Emmanuel Macron twice ran as a pro-business independent, but his government has just implemented food price controls and is now being accused by investors of “stealth nationalization” of a healthcare company. The UK Conservative government, supposedly the brainchild of free-market heroine Margaret Thatcher, adopted energy price controls, raised taxes and is reportedly now pursuing price controls of its own of food Meanwhile, the opposition Labor Party is pitching itself as the pro-business alternative, surprising everyone who saw them as far-left. And the shares? The rise, globally, of improving economic fundamentals and the simple reality that, for the most part, the attack is blocking major changes or eliminating major initiatives.
If anything, all the noise this week is a strange blessing: it hides the reality of the gridlock. International bluster makes it look like big things are happening, which keeps expectations low. Meanwhile, governments are doing very little to create winners and losers, which reduces uncertainty and allows everyone to get on with the business of investing, buying and selling. These boring, mundane transactions are where economic growth and investment returns come from. When no one notices a blockage, it becomes a wonderfully stealthy positive surprise. We believe that is where we are today in virtually every major developed economy in the world. Breathe and enjoy it.
