The stock market climbed to all-time highs, with the S&P 500 setting an intraday high of 6,012.45 and a closing high of 5,995.54 on Friday. The index gained 4.7% last week, the best weekly performance since last November. It’s now up 25.7% year to date and up 67.6% from its October 12, 2022 closing low of 3,577.03. For more on recent stock market moves, read: Getting to 'the other side' of election uncertainty and Wall Street reacts to the election results
Stocks surged after election results came in and the major news outlets declared former President Donald Trump the winner.
At least some of the rally can be explained by the removal of election uncertainty.
At the same time, the strength of the market response has arguably been at odds with what many economists consider the prospect of worse economic policies under President-elect Trump.
Maybe it’s traders and investors betting that policies bad for the market won’t actually be implemented. After all, what president would want to be affiliated with wealth destruction caused by falling stock prices?
This is an idea that was floated by Bloomberg’s Joe Weisenthal in Thursday’s “Odd Lots” newsletter (emphasis added):
Whereas bond market vigilantes are characterized by what they want to avoid (inflation), stock market vigilantes actually want something: higher profits. And also the higher the profits the better. Furthermore, the stock market is an important driver of wealth for millions of American households, and that also means an important driver of wealth for millions of American voters. When the stock market is down, people feel bad. When it’s up people feel good. If you’re an American politician (or President specifically), you’re forced to be sensitive to this in a very direct way if you want to be elected. It’s not really the same with bonds. The policy-markets nexus is just tighter with stocks.
Furthermore, because the stock market is how people fund their retirements (even for public employees with access to some kind of pension), pay for college, and so on, there’s arguably a limit to how long the American economic system can go without a rising stock market.
While there are many aspects of the economy (like inflation and employment) that can be tricky to define and measure, stock prices are very unambiguous. People’s investment portfolio values are regularly updated down to the penny.
I’d add that those voters with money in the stock market include the many billionaires with whom the incoming president has gotten cozy. And much of these billionaires’ wealth is tied up in the stock market.
Upgrade to paid
Assuming the president does not want to be associated with destroying the investor class’ wealth, this means his administration will likely think twice about going all-in on policies that could prove costly to the companies in the stock market. More from Joe (emphasis added):
This probably puts a constraint on populist, anti-market interventions. You saw this when the trade war with China started heating up under the first Trump administration, and there were days when the market’s reaction was sharply negative to the headlines. Those tariffs didn’t have a massive economic impact, and they didn’t have a massive market impact. But it seems reasonable to think about what a much more aggressive tariff regime would have on equities.
There’s also a constraint that emerges when thinking about re-industrialization efforts (efforts whose future is ambiguous under the next administration). The idea of investing more domestically in factories etc. sounds nice to a lot of people. But it’s a very costly process, with uncertain returns. Technological leadership is also not one-off thing that you just achieve one day. It’s a constant process of risky investment, which (if you don’t have a monopoly) keeps pushing profits further out into the future. It’s not an accident, I think, that China has seen extraordinary technological leaps while its stock market has been incredibly disappointing — endlessly building gigafactories doesn’t leave a lot of money left over for the equity holders. Also compared to the US, the stock market in China is not as important to most households.
Fortunately, policies don’t necessarily have to be enacted for the stock market vigilantes to intervene.
The legislative process is an onerous one. And all along the way, there are usually leaks about how policy proposals evolve and advance. For the proposals that matter to markets, the stock market vigilantes will adjudicate any developments in real-time by bidding prices up and down.
This means that harmful trade policies might actually never see the light of day if the stock market sends a strong enough signal, and the president is paying attention.
Because who would want to be remembered for being one of the very few presidents who was in office when the stock market fell?
Conflict Of Interests Or Aligned Interests?
I’m not sure speculating on the financial interests of policymakers, their billionaire backers, and their voting base is a bullet-proof strategy.
It sure sounds like a reasonable one though.
Being exposed to the stock market regardless of whom you voted for has historically been a good idea — and when you are exposed to the stock market, your financial interests are essentially aligned with those calling the shots because they are politically exposed to the stock market (and the economy).
Now to be clear, just because policymakers intend to bolster stock prices doesn’t necessarily mean they’ll be successful at it. Maybe President Trump, regardless of the policy landscape, sees the stock market fall during his term.
The good news is that cumulative returns for investors who are able to put in the time tend to be favorable, even when you are exposed to the stock market during a four-year stretch when prices fall.
A version of this post was originally published on Tker.co.
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