Except it’s not – really.
James Carville, Bill Clinton’s campaign strategist was right, way back in 1992, when he advised that it was the economy that would drive the political outcome, and not the other way around.
But for investors it’s very easy to get distracted by politics, but maybe it’s not that helpful.
We are bombarded. Every market outlook piece I read these days highlights politics (or if you prefer geo-politics!) as a key risk. I’m sure it was always there, but just seems more prevalent in recent years. And politics has certainly been newsworthy – but also you can argue that the 24-hour news cycle beast (both financial and conventional) needs to be fed. Today some market commentators worry over the market impact of the political pandemonium that is the Trump Whitehouse, the never ending process that is Brexit, the softening/hardening in North/South Korean relationships, the two way traffic in Russian and UK diplomats, etc. etc. There’s a lot.
But there’s a lot we can’t do much about either or add any value to.
And there’s a lot that probably (whisper it) doesn’t matter.
There was a good piece of research last year from JP Morgan Asset Management, looking at over 30 years of political economic and market data. The factors with the biggest impact on market returns were those like leading economic indicators, confidence and jobs. The factors that had least impact were political uncertainty and geo-political risk. The Financial Times recently highlighted how markets can be impervious to political events noting how the US economy hummed along nicely during the debt ceiling stand-offs and government shut downs in 2011 and 2013. Similarly both the market and economy punched in great numbers during the Bill Clinton impeachment proceedings in the late 1990s.
And so recently we’ve had the Trump tariffs garnering huge headlines, dominating the news agenda – but on the day of the announcement the stock market lost just over 1% and had gained that back by the following day! Last week – similar: big reaction, then claw-back.
So what’s the take-away? A lot of politics (or geo-politics!) is noise and while people (buy-side, sell-side, clients, etc.) may love to engage, and offer opinions it may not be that critical for how investment managers do their job. Being able to make sentences using phrases like “Straits of Hormuz” or “Capitol Hill” may be a skill but may not make you a better investment manager.
I know it’s a cliché but “focus on the fundamentals” (i.e. profits, inflation, interest rates, things that affect the quality or quantity of a future earnings stream) is maybe more important.
Views as always my own
Tradewinds 