The Stock Market Can't Ignore Politics Anymore

There's plenty of evidence to suggest that, despite all the attention the stock market seems to pay to elections, who is in the White House doesn't ultimately matter. The stock market has historically been relatively agnostic when it comes to politics, but that may no longer be the case.
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The stock market had a terrible week, despite the fact that a contested election should have been good for business.
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It's overly glib to say that politics never mattered to the stock market. Prospects for individual sectors can be impacted by changes to big entitlement programs or policy shifts. For example, Social Security's real fiscal challenges have been obscured by all the political rhetoric. And the government's response to economic slumps can exacerbate them.
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Although there is unlikely to be any big changes to the Social Security program in the short term, experts say that all the political rhetoric has obscured the program's real fiscal challenges.
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After a Texas judge ruled that the Affordable Care Act is unconstitutional, hospitals and insurance companies have been struggling. However, this may create a buying opportunity for investors in these industries.
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Politics is often said to be irrelevant when it comes to the market. For example, it is said that the market craves certainty. However, there are plenty of examples that show that politics can have an impact on the market. For example, the stock market is said to be affected by gridlock. And history shows that there are fairly reliable patterns—albeit with exceptions—across presidential terms, regardless of party.
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For as long as most investors can remember, the central bank has been there to bail them out. Now it seems like that may be changing, and investors may have to fend for themselves.
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Investors are betting on lower taxes and economic growth, which could be good news for retailers. Some believe this could also mean the end of inversions.
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In 2023, Congress will need to compromise on a federal budget and raise the debt ceiling. If the government shuts down, it could be painful for investors.
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Even though it can be tempting to ignore what policymakers are doing, there are some major global events that make it difficult to do so. For example, the pandemic has illustrated how important it is to pay attention to what policymakers are doing.
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According to Morgan Stanley Strategist Michael Zezas, we can expect more of the same in the future. He warns that factors like the Ukraine War and the U.S.-China trade spat have shown that policy choices and reactions can have a real and significant impact on the economy and markets.
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Nassim Nicholas Taleb argues that you don't need a crystal ball to predict the next Black Swan event. He believes that there are two major global transitions that will heavily influence politics in the future. The first is the move away from a model of global commerce centered on the United States. The second is the attempt to limit carbon emissions and climate change.
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The debt ceiling standoff is a good example of how politics can affect markets. While the U.S. has been in this situation before, that doesn't mean there's no need to worry. The market may be acting blasé, but the potential pain is still real.
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Zezas argues that the current situation looks more like the difficult negotiation that coincided with the S&P 500 dropping 17% in late July 2011. He notes that there are some key differences that policy-savvy investors will notice.
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As is the case now, a slim Republican minority in the House of Representatives is demanding greater government austerity. This "brinkmanship dynamic has no clear endgame and keeps austerity a meaningful possibility at a time when our economists expect GDP to be slowing considerably," Zezas writes.
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There is no guarantee that the early rally in 2023 won't fizzle. Dozens of indicators are raising the alarm about a slowdown, even as the economy grew during the 4th quarter. Mao Zedong isn't someone often quoted when it comes to free markets, but he once said that politics is war without bloodshed. He never said anything about its ability to spill red ink.
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There are dozens of indicators that suggest the economy is slowing down, even though it grew during the fourth quarter.