The Effect of Politics on Stocks
It is natural to think that one of the biggest influences of the direction of stocks is what’s going on in the headlines of Washington. That fact is certainly exacerbated by a very verbose and controversial leader or leaders.
You get where I’m going here? How much influence does President Trump have on the financial markets?
The real answer is-very little, although it doesn’t feel that way.
Stocks are driven by one thing in the long term: corporate earnings. That’s pretty much it. If earnings are rising, equities go higher. When they decline, we see drops and corrections.
That said, short term swings do occur by headlines, but they’re usually not sustainable unless they lead to negative effects on the economy. This eventually translates to lower corporate earnings.
For instance, let’s take a quick look into our recent past. The market soared in 2017, largely on Trumps new tax plan. It gradually became obvious that the impact of the tax plan would dissipate and not have the same positive effect in 2018. However, global economies started to turn downward last year at the same time, causing investors to question whether US corporate earnings would be hurt by this. This cause the market to churn and drift down.
The real pain came from what appeared to be a political standoff between President Trump and Fed Chairman Powell. As Powell appeared to insist that the Fed was steadfast in its belief that interest rates would rise consistently this year.
Stocks dropped, not because of the political friction between the two (stemming from President Tweet’s “tweets” to fire him), but actually because higher rates at a time of slowing global growth would hurt the economy and ultimately stocks.
Stocks quickly rebounded a few weeks later when Powell and his Fed cronies finally came to their senses and announced that not only were rates not likely to rise, but the next move might be to lower them in the face of slower worldwide growth. Thus, we have the strong start to 2019.
Don’t get me wrong, it hasn’t hurt the market that the resident’s tweeting has been very muted so far this year. The bottom line for the direction of stocks is earnings, not the minutia of government or the smoke and mirrors of politicians.
Earning’s in the first quarter of 2019 have been much better than expected with over 70% of companies beating expectations, and the direction of the stock market has followed suit.
Is this sustainable? I believe it is and this will be a good year for investors.
However, if you are retired or getting close you have to be more cautious. Pray for peace but prepare for war! Invest with confidence, but do so properly: Manage your money Tactically (never buy-and-hope), control your risk (Invest for need, not for greed™), have a forward-looking tax-strategy as part of your Retirement Master Plan, and have an asset protection plan firmly in place before the market goes down again. These are the things we help our clients do every day.