Politics and the Stock Market

Many years ago, Richard Nixon was asked what he’d be doing if he weren’t president. He said that he’d probably be on Wall Street buying stocks. One old-time Wall Streeter chimed in that if Nixon weren’t president, he too would be buying stocks.
I write this as Americans head off to the polls for Election Day. Despite a lot of the commentary you might hear, the effect of partisan politics on the financial markets is very much overrated. Very much. To be sure, it’s there, but it really isn’t much to worry about, and it certainly shouldn’t affect your financial decisions.
Barry Ritholtz posted a study by Ned Davis of how the markets have performed under different parties. This is interesting analysis, but in my opinion, I think they have it backwards. The assumption is that the political parties are like players on the field, and the stock market is the scoreboard. I think it’s just the opposite. The markets are the players; how the politicians behave is the scoreboard. That gets you a more interesting story.
The data shows that the market has done better under Democrats than Republicans. But this is largely due to the influence of the two major crashes happening under Hoover and Nixon. Here’s a though: Maybe it’s not partisan. Perhaps we should just avoid Quaker presidents!
It’s hard to say exactly how much partisanship influences the market. Of course, there’s the moment in U.S. history that’s indelibly marked on the national consciousness. I speak, of course, of 1948 when whatshisface beat that other guy, but the other guy won. The next day, the Dow fell 3.8%. So there you go.
Make no mistake, public policy does influence the markets (and vice versa), but it’s usually in unanticipated ways. It’s usually not the typical Republican/Democratic debate. Instead, it’s usually the kind of things that no one really pays attention to. Sarbanes-Oxley, for example, passed the House 423-3, and the Senate 99-0. It’s the unanticipated things that are so scary, because…well, they’re not anticipated.
Remember that when the new Senate meets in January, only about 10% of the members will be freshman. This isn’t a big change. In fact, our Constitution is designed against big changes. The ratio is the House will go from 8-7 Republican to something like 8-7 Democrat. If your city council did that, no one in town would care.
I’m not saying that voting isn’t important, or that getting involved is a waste of time. I’m simply saying that this has to be put in proportion. Just because people talk about politics at the office or on the subway, doesn’t mean the market cares. The stock market has its own agenda and it’s not up for election.

Posted by Eddy on November 7th, 2006 at 11:45 am

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