As the U.S. Federal Reserve has strategized its liftoff from years of near-zero short-term interest rates, financial media and markets have scrutinized its communications almost as if they were fortune-tellers studying the sky for signs to divine the future. Fortune-tellers profit from the human desire to find certainty in uncertain and fearful situations, and markets value certainty more than almost anything else -- even bad news, if it’s certain, is a basis for effective and rational action. The deeper the uncertainty, the more markets take a risk-off approach. However you slice it, that’s bad for stocks.
Which brings us to the political landscape shaping up in the United States ahead of the 2016 elections.
The current turmoil in the Republican Party surrounding its congressional leadership is a familiar one, pitting insurgents against pragmatists. Senior figures have chosen to step aside from the fray, fearing the damage that could be done to their future election prospects if they anger the wrong groups of donors and voters. In the political theater leading up to primary season, Donald Trump and Bernie Sanders have center stage, with holders of more moderate views languishing in the polls. It’s still early, and all this may change (it usually does, when the rubber meets the road). But it says something about the mood of the electorate -- and the power of a set of upstart media figures who help shape that mood.
It’s not just a Republican phenomenon. Established figures in the Democratic Party are also experiencing a populist uprising. And interestingly, the media who are keeping relentless pressure on incumbents and “Washington insiders” are bipartisan in their fury. Steve Bannon, the influential strategist behind conservative internet news site Breitbart News Network, published an exposé of the Clintons’ financial dealings earlier this year, but he’s readying a similar attack on Jeb Bush for imminent publication. “Cronyism” is the target, whether the alleged beneficiary is a Democrat or a Republican.
Perhaps from its beginnings, Americans have preferred revolution to evolution; when Thomas Paine said that “Moderation of principle is a species of vice,” he gave voice to an attitude that has characterized much of American politics since. There has always been a strong undercurrent of opinion that political chaos is preferable to “giving up on one’s principles.”
However, in a democratic arena, when the principles held by different sides of an issue are often wildly incompatible, moderation and compromise is often the only way forward -- while an intransigent insistence on pure principle often leads to a “scorched earth” political battle.
Who wins those battles, in the end? Ordinary citizens, workers, and businesspeople rarely do. That’s because ordinary citizens, workers, and businesspeople need a modicum of practical certainty in order to make decisions and plan for the future. An ongoing, full-out campaign between warring parties in government is not conducive to future planning, so those plans get put on hold. That’s bad for business, and most definitely bad for the stock market, which dislikes uncertainty.
Markets Really Like Confident Direction
The targets of the equal-opportunity uprising that’s currently brewing are “insiders” and “cronies.” Are there insiders and cronies profiting from corruption and imperfections in the American political and economic system? Certainly there are. But we would caution all sides to reflect on the fact that a perfect system has always been unattainable, whatever side of the conflict you support. An imperfect, tolerable, and functional system is, for many, preferable to chaos, especially for those who do not share the pundits’ total commitment to their ideals at any cost. The many who fear chaos will vote with their Dollars in a “flight to safety” away from riskier assets -- such as stocks -- if chaos is developing.
We are deeply familiar with cronyism and corruption. We’ve seen it in our decades of travel and experience in foreign markets, especially in the developing world, and we’ve often written about it in these pages. For those less familiar with the shapes that corruption can take, we will reassure readers tempted to exaggerate the failures of the U.S. system that from a global perspective, it’s just not that bad. Sometimes, violent revolutionary change is the only way a people can rise up and rid themselves of a truly evil government. The present-day U.S. simply isn’t one of those cases. (And even when that action is necessary, it’s important to note how much suffering it can create on the way to addressing the evils it’s fighting.)
That view is not shared by the uncompromising advocates of pitched warfare in U.S. politics. If they win out, they will create a political environment that generates uncertainty for market participants -- and trouble for stock markets.
Our readers should not mistake this statement for an endorsement or rejection of any political views; we are analysts, and our own views are completely irrelevant. We are simply observing that political actions have market consequences, and investors should be alert to them.
Investment implications: Populist sentiment and partisanship are having a resurgence in U.S. politics. Current campaigning ahead of the 2016 election primaries, as well as struggles for Republican congressional leadership, suggest that popular sentiment against “insiders” and “cronies” might lead to another period of uncompromising “scorched earth” politics. If the proponents of this approach win out, the ensuing battles will create a lot of uncertainty.
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