Politics and the Market: How Worried Should We Be?

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Sep 27, 2018 12:39:34 PM

and tagged Commentary

Leave a comment

politics and the marketWith politics heating up again—and the news from Washington driving scary headlines—I am getting more questions about what that turmoil could mean for the market. Will politics derail it? Will confidence be shaken? Should we be worried?

I can’t tell you how worried you should be about the politics of it. But from an economics and markets perspective, I can tell you that there really is no more reason to worry now than there was a month ago. In fact, recent data has improved even more, so there is probably less cause for concern. Let’s take a closer look.

Kavanaugh hearings

The most immediate concern for many is the Brett Kavanaugh hearings. But the Supreme Court doesn’t set interest rates and doesn’t control either tax rates or spending. From an economic standpoint, especially over the next couple of quarters, the current conflagration simply doesn’t matter. Watch the earnings, not the hearings. Listen to what the Fed says, not what the politicians say.

Beyond the noise

Aside from the hearings, the political/economic news is good. The House passed a spending bill, with bipartisan support, to avert a pending government shutdown. Tax cuts continue to act as economic stimulus, as does the additional spending Congress recently authorized. The government actually is here to help the economy. While there will be long-term costs, the short-term benefits are substantial.

The Fed is also on board. In its statement yesterday, the word strong appeared several times. Further, in the press conference, Chair Powell clearly showed he feels optimistic about the economy. In other words, beyond the noise, the policy underpinnings remain solid.

What about confidence?

This brings us to confidence. While the fundamentals remain sound, if either business or consumer confidence were shaken, that could certainly affect financial markets. So, could the current political turmoil shake that confidence? It certainly could; however, there are no signs that is happening.

Consumer confidence.  Consumer confidence, in fact, has ticked up to the highest level since 2000 and has consistently increased since the presidential election. The latest turmoil is really nothing new, and consumers have grown steadily more confident over time.

politics and market

Business confidence. We can see the same trend with business confidence, which remains above the levels of 2000 and close to the peaks of the mid-2000s. We have seen some temporary pullbacks, but business sentiment remains fully in expansionary mode. No confidence problem here.

politics and market

Market confidence. Finally, when we look at the markets themselves, we can see they remain confident. The chart below shows the valuation of the S&P 500, as expressed by the cyclical price/earnings ratio, divided by volatility. The combination of high prices and low volatility clearly shows a confident, even complacent, market. It also demonstrates a substantial recovery from the recent pullback. Clearly, markets were briefly shaken earlier in the year but decided on further thought that conditions remained good. While confidence can certainly shift, then, it has been tested and rebounded. With fundamentals even better now, that is likely to remain the case.

politics and market

Could politics shake the markets?

It is possible that politics could shake the markets. But as we have seen recently, as long as the fundamentals remain sound, confidence is likely to hold up—and that is just what we have seen since the election. It might actually continue to improve, as it has done in recent months. Should we pay attention to politics? As citizens, yes. As investors, not yet.

Subscribe via E-mail

New call-to-action
Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

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 into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) 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.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at 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®