How Politically Conscious Do You Need to Be for Stock Trading In spite of significant political risk in the air, markets don’t appear to be majorly affected.
TradeZero Ocean Place Cable Beach, Unit #1 Nassau, Bahamas
It is an accepted fact in stock trading and investing that various factors beyond the markets could also influence stocks. So it’s natural to wonder whether the current political climate in the United States and the world would really influence the markets. How do domestic and global political risks shape the market? Do they really have a part to play in the way the stocks move? Should you be looking out for these political headlines while make investing decisions?
Despite Political Risk, Markets Not Significantly Affected Seasoned analyst Martin Tillier believes there is significant political risk as a result of everything that’s happening, but wonders why the markets aren’t quite being affected by this. Trade wars, Fed rate hike talk, and international political happenings do bring about negative reactions, but as soon as those fears subside the markets bounce back. Tillier believes politics are being ignored. And there really are indications of a potential political crisis, particularly with the investigation into the actions of the President along with his campaign team. Tillier points out that there have already been four guilty pleas that have come out of the investigation. So it’s worth thinking whether the stocks could be affected as these political issues go further. For that, Tillier looks to past events.
www.tradezero.co
+1.954.944.3885
Did Markets React to Past Political Shocks? The scandal that resulted in an indictment in September 1972 and led former American president Richard Nixon to resign in August, 1974 caused the S&P 500 to lose a massive 52% in that period of nearly two years, as the chart below shows:
However, during the time between January 1998, when the Bill Clinton scandal became public to around February 1999 when the impeachment proceedings reached their conclusion, there was a positive reaction from the market, gaining nearly a third, though there was a big dip in between, as the figure below shows:
www.tradezero.co
+1.954.944.3885
Explaining Market Movement during These Political Events Some people consider this difference in market behavior as a result of Nixon being a Republican, and thus being pro-market, and whose resignation instilled fear and uncertainty in markets, and Clinton being a democrat. Tillier doesn’t buy that. Stock prices haven’t been affected by party affiliations of the Congress and White House as much as they have been affected by economic cyclical factors and government policies. In fact, this difference could be accounted for by the economic conditions of the respective periods:
www.tradezero.co
+1.954.944.3885
Back in 1972 we had the US economy heading towards a state of crisis due to factors such as the oil embargo. This brought about an environment of inflation eventually resulting in a recession and raising unemployment levels from somewhere in the region of 4% to 9%. Fast forward to the late 1990s, and the economy was basking in the dotcom boom. That explains the growth it was experiencing around the Clinton impeachment time.
Current Political Situation May Not Significantly Impact Markets The present political situation might not, after all, have any significant impact on the markets. Past experiences justify such a view. Tillier believes that even a “politically explosive” situation wouldn’t bring about any substantial impact on stock prices. It’s a further call for traders and investors to ignore news and rumors of scandals, and other such headlines, and focus instead on the existing economic situation, the economic outlook for the future, and corporate profitability which Tillier reckons are factors relevant to the stock market. So, the current political issues and investigations would probably not influence the markets in a significant manner. They would continue on their distinct path. And that’s one less worry for you.
www.tradezero.co
+1.954.944.3885