The Independent Market Observer

Politics and Investing

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Jun 23, 2022 2:56:37 PM

and tagged Commentary

Leave a comment

politics and investingFirst, a confession. I handled a recent comment on the blog badly. A reader wrote in with a question that I read as a political diatribe, and I dismissed it without taking the question itself seriously. I realized that my response was wrong and have since apologized, publicly, in the comment section of that post. I owe my readers, if I can respond at all, a thoughtful engagement with their issue, and I failed that standard. I will try to do better going forward.

The Politics Problem?

But the reason I didn’t respond well was this: As an economist, I can tire of politically slanted questions, no matter which side they come from. The questions are almost always some variation of, “With X party in office, the country is doomed. How can you say it isn’t the end of the world?” I have heard that in pretty much every election (certainly every presidential election) since I have been doing this. George W. Bush: the country is doomed. Barack Obama: the country is doomed, but from a different set of readers. Donald Trump: the country is doomed, from the first set. And with Biden elected, we are now hearing from the second group again.

As you may have noticed, both the economy and the markets grew during all of those administrations. Each administration had its own challenges and problems; nonetheless, we as a country continued to move forward. The world didn’t end, and companies continued to find ways to grow and make more money. Life went on.

A Limited Effect

This is the context I use when I evaluate political issues and questions. As an economist and market analyst, I shy away from politics and focus on the facts. The biggest fact of all is that the administration, no matter which side, has a very limited effect on the national economy and on the financial markets.

If you look at a chart of the economy or of the markets, and cover up the dates, you really can’t pick out when your party was in charge. Similarly, when you look at economic and market performance under various permutations of which party is in charge, there are differences, but they are not consistent over time. For all of the headlines and the fearmongering, politics and governance don’t make a significant difference.

The Strength of the System

How can that be? Simple. Every president and Congress would like to have control—but they don’t. States push back. The Supreme Court pushes back. Municipalities push back. It is rare that something significant actually gets through. And even when it does? The genius of the American system is that companies then set their collective minds on how to avoid it, if they don’t like it, and/or how to make money off it. For example, look at literally any tax bill ever passed.

Fundamentally, that is the strength of the American system. When you say that Washington will derail the economy or the markets, you are saying that it really controls all of the shoppers and the companies, which simply isn’t true. It is certainly in the interest of politicians to exaggerate their power (to motivate their supporters) and to exaggerate their opponents’ powers (again, to motivate their supporters). But the fact of the matter is that the U.S. economy is driven by millions of profit-motivated companies that will find ways to work around or profit from pretty much anything the politicians can do. Thank goodness for that.

Is It Different This Time?

Which doesn’t answer those who maintain that this time is different. That somehow today’s problems are worse than they have ever been before. There is always a constituency for panic. But if you really believe that, if you really believe that Washington—of one party or the other—can derail the country, then what you are saying is that Washington already has full control. That is not what I see when I look around.

What I see is the same vivid debate on policy we have always had and the same back-and-forth that ultimately results in a reasonable solution. Perhaps it is louder now, but it is still the same process.

Moving Ahead

One of my favorite quotes, from Winston Churchill, notes that you can always count on Americans to do the right thing once they have tried all the alternatives. I would argue that is what is happening now and that despite the short-term damage, which can be real, ultimately we will move ahead again. This too will pass. In another election or two, the politicians you hate/love will be replaced with those you love/hate—and life will continue.

Keep calm and carry on.


Subscribe via Email

Crash-Test Investing
New call-to-action

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®