State of the (Economic) Union 2010: is political news now a leading indicator of stock markets?
I can’t remember where I read it recently, perhaps even in the End of Influence, but the consensus among some who know more about it than I do is that stock markets, and most notably the U.S. stock market in particular, are becoming more sensitive and moving more in lockstep with national politics in the U.S.
The idea is that even ten, twenty years ago, a U.S. president didn’t have to worry so much about what he said or how he said it – markets would chug along and do their own thing and not overreact to such things. Today, though, this is no longer the case. A Republican gets elected in Massachusetts and the stock markets rally the next day.
Markets have always listened (in the more recent past) to whoever’s at the Fed, ever since Volcker, but the Fed has always been nominally “independent” and not part of the government.
I thought it would be useful to look at how this observation might be playing out in today’s markets – which have been rather hesitant and tenuous over the past month – are we reaching a tipping point? One day they were up on the Mass. win and the next trading day sunk down again as a result of Obama’s new regulations. Is this just the new volatility?
The January Effect: Will It Affect Your Investments?
Political Developments Affecting Markets
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1. Will Bernanke be re-confirmed? Bernanke stepped in in February 2006. Since Bernanke has been in office, existing home sales in the U.S. have continued to drop. Poll results are expected to be close – at least 17 senators have said they will vote against him and so far only 31 have confirmed they will vote for him.
He needs to get 60 senators’ votes before he can get the popular vote. This is keeping the markets on edge somewhat in the last week of January. Last week the bond market was temporarily affected – yields were falling due to this uncertainty. If he isn’t reconfirmed, it will most undoubtedly send markets downward. But even if he is confirmed, there is obviously less support for the Fed going forward.
When the Fed Is Expected to Raise Rates
2. Barack Obama’s 1st State of the Union Address on January 27, 2010. President Obama is expected to talk about incentives to help support the middle class, as well as how he plans to reduce the deficit in 2010. The speech will also be taken as an indicator and suggestion of Obama’s performance the first year in office and will likely give some indication as to Obama’s own thoughts on his success or lack of it.
3. Obama’s new Banking Regulations – these were announced last Friday and markets reacted negatively right away. The proposals are thoroughgoing and deep – and the possibility remains that additional regulations might be laid on top of the ones that have already been proposed.
4. A Republican Senator in Massachusetts. Of course, this means the Dems will have a potentially harder time passing any health care reform. Reforms which could have wide financial repercussions on many in the middle and lower classes if they are not enacted.
Market Jitters: Is This the End of the Risk Trade Rally?
More regulations, uncertainty and the question of whether or not the stimulus measures succeeded – none of these are traditionally good for markets. We’ve all been waiting for a shoe to drop anyway – will these developments be the tipping point? What do you think? Where’s our correction?!?!
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Update Jan. 26, 2010: Obama plans to call for a “domestic spending freeze” in his State of the Union: http://vf.cx/kpU (via @Viewsflow)
I have heard an alternative theory. That when people sense economic trouble, they turn to the conservative party for safety and careful money management; when they sense optimism, they forget their safer options and pick the party they can go shopping with.
Or maybe this is just a sign of the times living in the information age. We can know so much about so many things but the slighest wrinkle can cause conclusions both true and false. It’s akin to ascribing economic changes to crowd dynamics. I think we’re in a new paradigm and I would agree that this is the new volatility. Of course if it’s always volatile then that just becomes the norm.
@Paul – it’s definitely exacerbated by the info age – real-time everything, and more and more people having access to that real-time data. I think I figured out once that there’s only a less-than-36 hours window in which there is *no* stock market somewhere trading around the world, so we’re “online” practically all the time.
@David -makes sense, although you can see how easy it is to overturn those images – Dems caring more about social safety nets and Republicans supposedly more interested in boosting wealth of the rich, so it’s almost counterintuitive. But I don’t know so much about U.S. party politics….