In our October 15 letter, we noted the resurgence of partisan politics in the Democratic and Republican primary campaigns, and offered some thoughts about the effect that such populism could have on markets:
“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.”
The phenomenon of partisan politics continues to develop, and we continue to believe that it is not conducive to positive market psychology. The visible partisanship, however, may mask a more unifying trend among voters of all stripes. A recent poll by the Wall Street Journal and NBC News sheds some additional light on the phenomenon, underlining the increasing alienation that a significant part of the U.S. electorate feels from the electoral system. (As before, we are not concerned with predictions about who will win the primaries, who will win the general election, and what policies they will actually try to implement. We strive to be apolitical in our analysis, neutrally evaluating the effect of electoral results and of voter psychology on the state of the market.)
The WSJ/NBC poll found that 69 percent of respondents agreed with the statement that they “feel angry because our political system seems to only be working for the insiders with money and power, like those on Wall Street or in Washington, rather than working to help everyday people get ahead.”
Strikingly, this sentiment cuts across every demographic and political divide. Republicans tend to be more upset that the culture is shifting from underneath them and becoming unrecognizable; Democrats are more likely to express satisfaction with social progress towards more equitable treatment for minorities. But large numbers of voters within every group are convinced that the system works only for insiders.
Candidates will give messages that resonate with the distinctive views of their political base, but there is a common denominator in the feeling of helplessness, anger, and alienation noted above. This will mean that when the general election gets underway, and the candidates perform their predictable tack to the center after playing to their base during the primaries, they will be competing for this large swath of the electorate (which includes 44 percent of the elusive independent “swing voters”). The rhetoric will vary by party, but its thrust will be the same: to distinguish the candidate who’s speaking as an outsider willing to overturn entrenched interests and fight for the little guy. (How any of the mainstream candidates, all of whom are powerful, long-term participants in the upper echelons of America’s economic and political systems, will manage to brand themselves in this way should be interesting to see.)
Thus, we believe that the next year will be characterized by a great deal of public political rhetoric that tries to make use of the fear and alienation of much of the U.S. electorate to further the candidates’ campaigns. In different ways from different candidates, that will work to keep that fear and alienation in the forefront of public consciousness, rather than assuaging it.
This, we argue, will be a drag on market psychology, and may prolong the pessimism that has spent the last several months probing every economic data point for auguries of disaster. As we note below, we see good reasons to believe that the fundamental news for the global economy will be good, but poor psychology is more than capable of muting the influence of positive fundamentals.
Investment implications: Despite the emergence of increasingly strident partisanship in the current presidential campaign cycle, U.S. voters seem to be united across all demographic and political divides in their sense that the political and economic system of the country is “fixed” to work only for Washington and banking industry insiders. As the campaign season unfolds, it will likely see candidates seeking to appeal to this sense of alienation and fear. This may cause a psychology of pessimism to persist, even as more economic fundamentals turn positive.
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