Stocks drive higher, brushing aside worries about U.S. stability
Stock prices have soared for months in defiance of an ailing, pandemic-wrecked economy. Now they seem impervious to something even more disturbing: the erosion of American democracy.
Last week’s shocking events, when an American president incited a mob to confront lawmakers preparing to certify his electoral defeat, raised alarms about the health of U.S. governing institutions.
But the country’s political decay will need to get a great deal worse before it knocks financial markets off stride, analysts said. That’s good news for investors, but it also means that Wall Street is unlikely to act as a brake on further institutional deterioration.
“The market is agnostic about politics,” said Marc Chandler, chief market strategist for Bannockburn Global Forex. “We like to think democracy is better. But at the end of the day, investors don’t seem to care so much about that.”
Still, if the violence and rebellion worsens, average Americans eventually could pay. The entire economy benefits from the pools of global capital that are invested in U.S. stocks and bonds. If investors lose faith in the U.S. system, the consequences would be felt on Main Street.
“If global investors suddenly develop suspicions about the U.S. political system, that it’s not stable, they will stop buying our debt. So U.S. interest rates will go up. Mortgage rates will go up,” said David Smick, an adviser to hedge funds and investment firms. “When interest rates go up, it’s not good for the stock market. So people’s 401(k)s will go down . . . . There are a lot of really ugly scenarios that could unfold.”
Unprecedented televised images of rioters attacking police, battering the U.S. Capitol’s doors and windows, and vandalizing lawmakers’ offices staggered foreign officials and executives, said Smick, who last year grew so concerned about the domes
tic situation that he funded “Stars and Strife,” a documentary film about the growth of political discord.
Last week’s drama was a reminder that the $21 trillion U.S. economy rests on a political foundation — the consent of the governed, rule of law, freedom of speech — that allows individuals to count on a level playing field as they jockey for riches.
All of that seemed under threat last week when an unruly crowd of Trump supporters broke through police barricades and ransacked offices in the Capitol, interrupting lawmakers who were certifying President-elect Joe Biden’s election victory.
“Markets globally look at us and what do they see? Huge political dysfunction,” Smick said. “You can’t believe how stunned they are.”
Yet Smick and other market observers do not expect the democratic unraveling to dent asset prices anytime soon. In this view, the U.S. system, though battered and under threat, is holding.
Trump’s bid to persuade Vice President Mike Pence to exceed his constitutional powers and overturn Biden’s November win failed. Congress formally recognized the Democrat as the next president after dozens of federal judges — including some appointed by Trump — blocked his election challenges. And the media has kept citizens informed of the president’s scheming.
Despite last week’s violence in Washington — and the danger of a repeat performance — both financial and political conditions are near-perfect for stocks, analysts said.
The outcome of the November elections means Biden will have enough support to do things investors like, but not enough to do the things they don’t like.
Democratic control of the Senate, following the party’s sweep of two Senate seats in Georgia, makes it more likely that Biden will be able to get economy-boosting proposals, such as a multitrillion-dollar stimulus, through Congress.
But with the upper chamber split 50-50, Democrats must depend upon Kamala Harris as vice president to break any ties, dooming the progressive wish list that Wall Street abhors, such as Medicare-for-all or steep income-tax hikes.
Financial conditions are even more favorable. With the Federal Reserve planning on keeping interest rates near zero for years, business borrowing costs will remain low and stocks will face little competition from bonds for investors’ cash.
Since March 23, the markets’ pandemic low, the Dow Jones industrial average has risen roughly 67%. The bluechip index hit 31,000 for the first time Jan. 7, the day after the Capitol riot.
Stocks’ impressive returns are a reminder that the market measures just one financial metric: companies’ future earnings prospects. Though politicians often speak of markets as if they represent a comprehensive report card on the economy’s health, they don’t.
To be sure, outside events can temporarily jostle investors. But unless they represent a lasting change in the ability of companies to earn money, even the worst development becomes a mere blip on traders’ screens.
Few days were potentially more alarming than Nov. 22, 1963. President John F. Kennedy’s assassination that day horrified Americans and shaved nearly 3% off the Dow Jones industrial average.
Yet when trading resumed after the president’s funeral four days later, stocks regained the lost ground in a single trading session before continuing their ascent for an additional 2½ years.
Still, it’s not difficult to conjure up reasons for concern about the current U.S. outlook. The mayor of Washington is urging Americans for their own safety to avoid the Jan. 20 inauguration. The outgoing president just became the first chief executive in the nation’s history to be impeached for a second time. And despite thousands of armed National Guard troops ringing the Capitol, there are fears that the mob may return.
Yet investors are taking the tumult in stride. The Dow remains above the 30,392 level it reached Jan. 5, the day before the abortive insurrection. The U.S. dollar also has gained fractionally against major world currencies since last week.
If investors are sanguine, it may be because the country has weathered plenty of turmoil in its nearly 245-year history.