Politics matters little to your investment outcomes.

This has been a theme of mine for nearly forever. I discuss this in presentations all the time.  It was — literally  — my first column for the Washington Post.

And yet the financial press simply cannot get enough of this stuff. They love a good narrative. While these story lines make for good copy, they also make for terrible investing advice.

Consider the market impact of the past Fiscal Cliff (none) and the Sequester (rally mode). Both of these events are relatively minor compared to past historical events of far greater import that also have had negligible impact on markets.

What has the overall effects been on investments of past historical events? Consider the attack on Pearl Harbor, which led the US to entering WW2; the Soviet Union’s launching of Sputnik into space, and starting the cold war arms race. (I can’t forget the Cuban Missile Crisis or the Iraq and Afghanistan Wars). There have been momentous events with U.S. presidents — the assassination of President John F. Kennedy, the resignation of President Nixon, the impeachment of President Clinton — none of which really impacted investment values much.

In none of the above, did the markets react unusually. At most they wobbled a bit, before resuming their prior trend. Even the horrific attacks of 9/11, which saw markets closed for almost a week, had a big selloff, followed by an even bigger snapback rally — followed by markets returning to the prior trend, which was the post-2000 popped tech bubble down slide.

The lesson investors should learn is while these events may transfix us emotionally, they have almost zero impact on corporate revenues, profits and valuations. They are what drive most of your investment results, aand not what is on C-Span . . .





Why politics and investing don’t mix (WaPo February 6, 2011)

How important is the fiscal cliff for investors? Hint: Not very (WaPo, November 20 2012)

Contextualizing the NFP Data (April 1st, 2011)

Wise Up to the Proper Flaws of Monthly NFP Data (May 4th, 2012)

Category: Cycles, Markets, Politics, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Investors Should Ignore Politics”

  1. Richard says:

    Market did decline in August 1990 (Iraq invasion of Kuwait) and popped back up again in Feb/March around the time of Desert Storm, if I recall correctly.

  2. Qualifies as a wobble!

  3. InterestedObserver says:

    One’s view really depends on the time frame employed. I don’t view myself as a trader and I tend to take a multiyear timeline. In that world, the recent implosion is basically a wobble on the flat line we’ve had in this secular bear since 2000 or so. Yea, there was a 2x change in valuation, and it would have been nice to sell high/buy low and ride up, but it’s still a flat part of the curve. Long time horizons and log scaling on the y-axis gives you a different perspective than reacting on a day/week/month timeline (i.e. reacting to politics).

  4. BennyProfane says:

    And yet, many seem to listen to Kernan and Kudlow drone on (heh) about the evils of Washington.

  5. Moss says:

    Too bad all the blow hard Financial commentators don’t follow that advice. It is easier to determine their political beliefs then their rational for a stock pick or an economic forecast. They wrap themselves up in their political colors first as if it adds credibility to what they are about to say or have said.

  6. ironman says:

    We think the term noise event best describes the intersection of politics and markets, with a typical one represented by the short-lived reaction to the indeterminate outcome to an election in Italy. “Wobble” is a good description – it’s not something that an investor should much worry about, but for a trader, these kinds of noise events present some opportunities.

    Still, we have seen just recently seen where politically-driven events drive a more fundamental reaction by investors and companies, the effects of which are still playing out in the market.

  7. Greg0658 says:

    I’ll banter hopefully without ire .. the premise “it just doesn’t matter” – can’t buy it fully.
    TV & other Media has influence, that IS its reason to exist as a pay for exposure model. It also exists to provide diversion from lifes inequities and inform in the good term.

    In the term “did the markets react unusually. At most they wobbled a bit, before resuming their prior trend” .. that is the question isn’t IT – how can a small shot be fired to get the result desired. Been working on that for sometime myself. Seems nothing corrects the mis-steered ship back onto course. Not sure how you get the 5% for nothing.

    On this “Market Politics” – a subject we dance around here – but I haven’t flushed out yet myself is the DOW chartflow stat. Up Down. Seems as a kid growing up I would have been much more informed in this matter if the chart included more flows. Not just the DOW is growing Bull – the Bears are running the Bulls down. Now that I’m older I understand that cash doesn’t burn up – it flows from 1 place to another – and it starves the nitwit or feeds the informed at the goldilocks just right price.

    other food fight thoughts:
    Dennis Rodman in NKorea – the Fox interview – that prisons statement – counter the skuttlebutt with our population behind bars for; being influenced poorly, conditions of no-resort; AND not least – doing something other folks just don’t want you to do – its called the law of the land … but, that was a crazy encounter tho and banter worthy (wasn’t Eric Schmidt of Google over there too) not sure which #Estate is bopping behind/in-front-of Amb. Kerry

  8. Iamthe50percent says:

    Regarding Kernan and Kudlow: Wasn’t there a radio commentator in the ’90s that touted stocks? He was very influential until it was disclosed that he was taking payola for his “tips”.

    Always believe the worst of human beings. That way you will never be disappointed and often will be pleasantly surprised. But be most suspicious of the man who wants to sell you something that will make you rich.

  9. Concerned Neighbour says:

    I’m in full agreement. The only thing of any significance to watch is what central banks are doing.

    No signs of any bubbles being blow around these parts, Mr. Bernanke. No signs at all.

  10. Petey Wheatstraw says:

    Maybe in the short term. In the long term, I’m not so sure. It seems that bailouts (and, at this point, the entire economy, itself), are purely political.

    Is the chart in the following link a reflection of politics, or is it a reflection of organic adjustments of self-correcting markets?


  11. Super-Anon says:

    Couldn’t disagree more with you Barry…

    The monetary system has essentially become a mechanism for realizing political objectives rather than representing the value of real economic activity.

    The reason you can pretty much bet that the Federal Reserve is always going make decisions that perpetuate bubbles rather than burst them is precisely because responsible monetary and fiscal policy would interfere with political objectives.

    The monetary system and financial system today are first and foremost political mechanisms.

    The accurate representation of wealth is increasingly an afterthought and a nuisance.

  12. Julia Chestnut says:

    It has long amazed me to hear the talking heads boldly assert that some market movement is CAUSED by some bit of news – political or otherwise. Wait, doesn’t the dominant economic paradigm say that all possibilities for ordinary “news” are priced into the stock already?

    If the market already has its bets placed on which way any given economic number or bit of news will turn out, whose money is it getting yanked around on the tail of that information? Probably not the money I want to follow.

    In the real world, it is generally extremely hard to show that any particular thing is CAUSED by another thing. And yet I hear that causal link spouted on all of the financial news stations all the time. Whenever I hear a superficially logical explanation that has no connection to things I know from the real world, I instinctively reach to make sure my wallet is still there.

    But on a larger scale, I would argue that politics is what is driving this market almost entirely. Of course, it has to do with certain interests having purchased the political apparatus for their own purposes, and not political news of one kind or another. Different things, that’s for sure.

  13. RW says:

    Indeed, investors should not be distracted by the political game, but that is hardly the same thing as ignoring the policies arising from that game; e.g., two and a half million unemployed begin receiving reduced benefits as of March 1 because of sequestration and because that hits roughly half way through the fiscal year, it is not a 5% benefit cut, it will be closer to 11% …that along with the mounting furloughs, program suspensions, etc will drop consumption and GDP growth roughly half a percent.

    Worth ignoring? In the early stages of a bull rally, probably yeah. In an economy entering stronger recovery, sure. With a FOMC unequivocally committed to QE for the duration (and primarily focused on equity prices to boot), oh yeah. …worth a modest bet that none of those conditions actually exist, well, yeah.

  14. Super-Anon says:

    BTW think about how much easier it is for an administration to push through legislation it wants when their approval rating is high because the stock market keeps hitting new highs everyday…

    Maybe in your mind you can justify deliberately tolerating and supporting bubbles because they give the means to execute that grand scheme you have for saving the world.

    In the end no doubt it will all work out for the best!

  15. Greg0658 says:

    yesterday I had an epiphany
    “Spare the rod – spoil ones own child” is at least 1 parties way of inducing performance .. combined with the mechanism of spanking other nations into submission as daily bread

    local social programs vs military spending .. is a base guidance

    Warsh vs Kernan “has any central bank ever successfully got out” (paraphrased) ..
    me vs thread “maybe not a central bank – but a king yes”

    its 1 or the other > invasive species capitalism or a New OpSys (imho)

  16. petercoldgrave says:

    Maybe politics sometimes matters. In the 14 months after Spiro Agnew resigned under a cloud in October 1973, the Dow Jones Industrial Average declined over 40%. Agnew had economic clout!


    BR: Classic Correlation

  17. louiswi says:


    The above click is a pretty interesting video this morning.

    …corporate revenues, profits and valuations. They are what drive most of your investment results, aand not what is on C-Span . . .

    I totally agree with Barry on this post. Turning the TV off is the first step to clearing the mind on investment strategies.

  18. Concerned Neighbour says:

    Perhaps it would be useful to have a discussion of what constitutes a market bubble. I would submit one characteristic is that it’s a near impossibility for the market to ever go down. Of course, I doubt Mr. Bernanke would like such a definition, considering his endless monetary injections are likely accountable for this phenomenon.


    BR: See these:
    Can the Fed Pop Bubbles (And If So, How)?


    Fed: We Will Pop Future Bubbles

  19. spooz says:

    I believe what Bernanke says on C-Span has more to do with capital markets and prices than any of the fundamentals you mention.

    “The lesson investors should learn is while these events may transfix us emotionally, they have almost zero impact on corporate revenues, profits and valuations. They are what drive most of your investment results, aand not what is on C-Span . . .”

  20. Iamthe50percent says:

    Louiswi’s link is indeed mindblowing. I knew the numbers but the graphics drive it home.

    We’re not in Kansas anymore, we are in Victorian England.