National Post (National Edition)
Shutting out the noise of bad politics
From Capitol Hill in Washington, D.C., to the Diet in Tokyo and the National Assembly in Paris, you don’t have to look too far to find political turmoil in this world. As human beings, that might sadden us, madden us, or make us want to throw up our hands and take the next rocket ship to Mars. As investors, though, we need to be a little more earthbound and rational, but it’s not easy to be calm in times like these.
Maybe, 50 years ago, you could blissfully ignore what’s going on in French politics, secure in the knowledge that whatever was going on probably didn’t matter very much to your grandma stocks and government bonds. Not anymore. These days, we’re bombarded with messages about how the election of Marine Le Pen, however improbable, will spell the end of modern civilization, or at least the European Union.
If we, as individual investors, put stock in all the noise, we’d run for the exits, screaming “Sell! Sell! Sell!”
Yet when investors act collectively, as markets, they don’t really do that. In fact, ascribing lasting market meltdowns to cases of political turmoil is a highly questionable exercise.
That’s not to say political dustups can’t matter in the short run. In Japan, for instance, Prime Minister Shinzo Abe’s popularity has suffered recently amid an allegation that his wife, Akie, donated a million yen to a nationalist primary school accused of propagating hate speech. Amid the scandal, the Nikkei 225 hit a six-week low early last week.
You can see the probable thinking behind the sell-off: Abe’s wife might be in trouble; Abe might be in trouble; Abe’s economic policies have supported equity prices; equity prices are in trouble – so let’s sell!
You could just as easily ascribe the Nikkei’s woes to seemingly escalating tensions between the West and North Korea and China.
Another example: During the darkest depths of the Watergate scandal (which I’m slightly embarrassed to admit I remember), U.S. equities performed terribly. Between December 1972 — a month after Richard Nixon won re-election in a landslide — and August 1974, when the president, now “Tricky Dick,” resigned, the S&P 500 lost more than 40 per cent. Clearly, that’s an example of a political event driving down markets, right?
Not so fast: A lot of other things were going on back then. One was the oil crisis that began in 1973, when Arab members of OPEC cut off supply to the United States. Another was the stilllingering turmoil brought on by the U.S. withdrawal from the Bretton Woods currency accord. A third factor was Nixon’s penchant for politically popular but economically disastrous policies, like wage and price controls. (Nixon, of course, wasn’t alone in that — our current prime minister’s dad thought capping prices and pay was pretty cool, too.)
Even in cases in which political events clearly drive down stock prices, the effects tend not to last very long. Global markets recovered from Brexit within a few days. The warnings about a Trump victory hurting stocks did hold true — for about a millisecond, before markets began their remarkable climb last November. In Japan, by the end of last week, the Nikkei had rebounded because the yen had fallen against the U.S. dollar — which apparently is better for Japanese stocks than political scandal is bad for them.
So let’s consider the recent conjecture about how U.S. President Donald Trump’s troubles getting through Congress his first major policy initiative — health insurance reform — signals the end of the so-called Trump Rally. The thinking is clear: Trump can’t get Obamacare repealed; therefore, Trump’s other policies, like tax cuts and infrastructure spending, are therefore in trouble; those policies have driven the rally; the rally is over.
That’s perfectly plausible, I guess, except it gives far too much weight to the presidential factor. Granted, it’s possible that not cutting taxes won’t help corporate earnings. But it won’t hurt them either. And even without any real economic policies out of the White House, the U.S. economy is still rebounding and the Federal Reserve is still raising interest rates. Insofar as those things are good (or bad) for stocks, they are good (or bad) almost no matter how ineffective the White House turns out to be.
In fact, the upside of an ineffective Trump might outweigh the downside, given that other of his policies — especially trade protectionism — could really hurt. Bad politics might not be able to hurt stock prices by very much or for very long, but bad policies almost certainly can.