Big Political News Doesn’t Mean Major Market Relevance

Editors’ Note: MarketMinder is politically agnostic. We prefer no politician nor any political party in any country, and we assess developments for their potential economic and market impact only.

Here is the thing about politics and stocks: If you don’t check yourself, it becomes very, very easy to obsess over news that seems seismic from a societal standpoint but doesn’t mean much (if anything) for stock returns.

We say this because political news is dominating today’s headlines globally, and pundits are trying (and in our view, failing) to extract economic implications from all of it. In Scotland, for example, former First Minister (and former Scottish National Party head) Nicola Sturgeon was arrested over the weekend in conjunction with a simmering scandal about the party’s alleged misuse of funds. She was released without charge pending further investigation, but that hasn’t stopped some corners of the UK press imagining a new day where the SNP is out of Scottish government and a fresh administration can improve the country’s economic competitiveness—lifting the entire UK economy in the process. Never mind that there is another upstart nationalist party and it is far from certain that a party running on a pro-business platform would win the next Scottish election, which isn’t due for nearly three years—or that they would even be able to enact any meaningful, well-crafted reforms.

This isn’t an isolated case. News of former Italian Prime Minister Silvio Berlusconi’s passing didn’t just bring some of the more salacious political obituaries we have had the misfortune of reading—it also brought speculation that Berlusconi alone was shoring up the center-right Forza Italia Party. Some now argue his passing will allow Prime Minister Giorgia Meloni to bolster her Brothers of Italy party’s ranks in Parliament, as she could absorb Forza Italia defectors. Perhaps, but people switching from one party within a coalition to another doesn’t change the balance of power, nor the gridlock inherent in multiparty administrations like Italy’s. To us, the speculation seems like an attempt to argue that Meloni’s moderation was temporary, and now all the radical legislation people feared when she first took office will finally kick in—the latest iteration of Italy fears that stretch back to at least 2010. That seems very much like a stretch in a three-party coalition like hers. The competing interests haven’t gone away—they just have a less visible figurehead with Berlusconi gone.

And then we have the second indictment of former President Trump and the ongoing House investigation into an alleged influence peddling scheme involving President Biden, which have cranked the US’s political outrage industry up to 11 on both sides of the aisle. You don’t need us to tell you that every talking head on cable television is banging on about what this means for 2024. Never mind that we are over six months away from the primaries, with challengers in both parties still declaring and no debates yet on the books, much less in the books. The time will come for investors to focus on 2024 and its stock market implications, which will chiefly boil down to whether that contests raises or reduces gridlock—and how that reality squares with expectations. But with primary races still just loosely taking shape and the very long history of early polls reflecting name recognition more than probabilities, that time isn’t now.

If you care about this news from a personal or societal standpoint, fine. If you actually enjoy sociological commentary on what George Soros’s passing the torch to his son might mean for this or that political cause, hats off to you. We aren’t saying any of this is trivial. But basing investment decisions on what you think today’s political stories might mean for elections that are well over a year (or two or three) away is sheer speculation. The problem is, markets don’t move on possibilities. They move on probabilities and how those probabilities relate to expectations. If you can’t assign probabilities and expectations aren’t clear, we think you have no rational basis to buy or sell a stock.

Another risk: Basing your decisions on things the market just doesn’t care about and doesn’t price in. Politics involves a huge array of things, some having zero to do with markets. On one side are the developments that actually affect the economy and the incentives to take risk and invest. That will generally include taxes, regulations and property rights. These things markets care about (although to varying degrees and often in counterintuitive ways). On the other side are all of the other things that might make some folks cheer and others’ blood boil but don’t actually change how the country does business. We classify all of this as sociology. And stocks have a long, long, long history of yawning at sociology. It just isn’t a market driver.

This is where the pitfalls for investors materialize. Politics is an emotional topic for many, and all too often that emotion can bleed into people’s investment decision making. We see it time and again. Opinions about the sociological side of things make people draw conclusions about the economic side of things, usually based on feelings—feelings that don’t match the economic reality. Seeing a party do something you love on Issue X doesn’t mean their economic policies will be some massive positive surprise that will send stocks soaring. Similarly, seeing a party doing something you detest on Issue Y doesn’t mean their economic policies will wreck markets.

Often it is a lot messier than that. Political parties and leaders globally have reputations for being pro- or anti-business. In most cases, neither is deserved, raising the risks of basing your expectations on traditional political biases. French President Emmanuel Macron ran twice as a pro-business independent, yet his government just implemented food price controls and now stands accused by investors of “stealth nationalization” of a healthcare company. The UK’s Conservative government—supposedly intellectual descendants of free-market heroine Margaret Thatcher—adopted energy price controls, raised taxes and is now reportedly pursuing its own food price controls. Meanwhile, the opposition Labour Party is hanging out a shingle as the pro-business alternative—surprising everyone who wrote them off as lurching far-left. And stocks? Rising, globally, on improving economic fundamentals and the simple reality that, for the most part, gridlock is either blocking big change or sanding down big initiatives.

If anything, all of this week’s noise is a strange blessing—it hides the reality of gridlock. International bluster makes it seem like big things are happening, which sets expectations low. Meanwhile, governments are doing very little to create winners and losers, which reduces uncertainty and lets everyone get on with the business of investing, buying and selling. Those boring, every-day transactions are where economic growth and investment returns come from. When no one notices gridlock, it becomes a wonderfully stealthy positive surprise. We think that is where we are today in pretty much all major developed economies worldwide. Take a breath and enjoy it.