How Politics Influences the Stock Market: Not Very Much

by PETER EAVIS
from NYT

Before long, someone is going to call this the Hillary rally.

As the chances of Mrs. Clinton’s nomination have strengthened, the Dow Jones industrial average has soared, rising 2,344 points, or 15 percent, from its recent low on Feb. 11.

Other factors could have helped drive stocks higher. They had fallen a long way before the rally, the outlook for company earnings has improved slightly, and fears about the strength of the world economy have subsided a bit.

It wouldn’t be wise to also call it a Trump rally, though he is leading on the Republican side. During this period, as Mrs. Clinton’s grasp on the nomination tightened considerably, the polls show her beating Mr. Trump in November.

But here’s some advice for anyone in the Clinton camp who might want to point to the market’s jump as evidence that investors would be happy with her winning in November: Don’t.

Time and time again, political partisans have tried to recruit the stock market to their side. Most of the time it backfires.

One of the most famous examples of this occurred in the months after Barack Obama was elected in 2008. The stock market, still roiled by the financial crisis and a horrible global economy, was plunging. Right wingers said investors were selling because they were fearful of the new president’s policies, and called the rout “the Obama bear market.”

But in March 2009, days after The Wall Street Journal opinion section published an article headlined “Obama’s Radicalism Is Killing the Dow,” the stock market embarked on a bull market that has kept going to this day. (I do need to note that in 2012, a brief “Romney rally” occurred.)

But left-leaning pundits are not immune to using big moves in the markets to bolster their arguments for certain policies. When concerns about China sent global stock markets lower at the start of this year, Larry Summers, a Harvard professor and former secretary of the Treasury, wrote in The Financial Times that it would be wise to heed the fears of the financial markets.

The article contained plenty of caveats about not slavishly reading too much into the markets. But Mr. Summers also contended that markets “are like canaries in coal mines: very valuable in giving warning when conditions change.” But the same markets are rising and appear to be signaling optimism. Were they right then but wrong now?

In an email exchange, Mr. Summers said that the thesis of his column was that policy makers should have been more worried than they seemed to be at the time about the outlook for the global economy. Since then, Mr. Summers said, the Federal Reserve has significantly modulated expectations of monetary tightening.

As a result, he contended, the upswing in the markets “was in significant part the result of policy doing what I urged — ‘heeding market warnings.’ ”

More broadly, he added, “Think of markets as a mediocre but not hopeless weatherman making probabilistic forecasts.” (His comments came after publication because I overlooked his initial response to my query.)

The news media can also be guilty of reading too much into the markets. And by news media, I mean me. In January of this year, I raised the possibility that it may be time to take swooning markets seriously because of what they said about the economy.

The market does contain important signals that can tell a bigger story, but it’s a job to separate them from the noise and pure speculation. Sometimes markets react to specific political events. If Mr. Trump were to start polling strongly against Mrs. Clinton shortly before the presidential election, while still pledging to introduce tough protectionist trade policies, the stock market would most likely sell off on fears of what those policies might do to the economy.

But you could reach the same economic conclusions without ever looking at the stock market. Most of what the markets appear to be saying can already be guessed at by looking at other sources.

Markets also misread what’s going on in the wider world. They don’t have a special clairvoyance. They also don’t always say what we think they are saying. The recent rally may indeed be a sign that investors would be O.K. with Mrs. Clinton winning, and the rally may even signal that she will win.

But would her chances be any lower if the markets plunged for purely economic reasons? They could be higher.

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