I often see people using the performance of the stock market as a way of evaluating the success the political climate of the time. A meme made the rounds last year that included the rise of the S & P stock index during his presidency as a measure of Barack Obama’s success. If that is an accomplishment that one should be proud of, then Donald Trump must be the best president we ever had. You only need to look at how the stock market has performed since Election Day to see this. There are indeed some people who believe this. Even the sharp drop in the stock market last Wednesday does not dissuade them. That drop came as a special counsel was appointed to investigate the Trump campaign and the possibility of obstruction of justice within the administration, but the market has rallied in the following four sessions and regained most of what it lost as the news cycle quieted. This is a fine example of what I like to call a “just kidding rally”, and it points out how the stock market is not reality.
That said, Wall Street does mirror our political scene in bizarre ways. There is a battle of two different ideologies that mirrors our partisan divide. One side has more real world facts on its side, but the other has the better marketing for its positions. There is a blurring of who is on which side that serves to confuse matters, and strengthen those who eschew real world evidence. The two schools of thought combine in ways that do not always stand up to close inspection or analysis.
Wall Street is divorced from the real world in the first place because it is a game for the wealthy. You have to be able to afford the buying and selling of individual stocks, as well as more esoteric and speculative investments, to have an influence on how the market moves. You live in a world where your personal spending is not affected by increases at the pump in the price of gas. The jobs that are lost in mergers and acquisitions are not real to you. Drastic cuts in programs for the poor are seen in the light of deficit reduction, while the impact on consumer spending, and therefore ultimately on jobs, is conveniently ignored. The majority of the members of the House and Senate also live in this world, which makes it easier for them to evaluate the laws they pass in terms of how the market responds. Massive tax cuts for the rich do not go into the economy and create jobs; instead, they are invested for long- and short-term profits in the market, boosting the portfolios of many who voted for them. Market growth is not economic growth, and eventually even investors pay the price for this dichotomy, but too many policy makers can not see this. I just referred to “investors”, and thereby illustrated part of the problem. Wall Street is actually divided into investors and traders, and this is also reflected in our politics. Traders are looking to buy and sell stocks and other financial instruments rapidly, a year being a long time frame for them. They are looking for positions they can take for short term gains. Real world reasons why a stock should do well over time, such as the viability of the product or the soundness of the company, do not interest them. Instead, traders have developed an esoteric method of analyzing price charts to predict near term price movements of a given financial instrument. This type of analysis has become so involved that there is a tendency to lose track of the real world reasons for these price movements. Often, these reasons come down to mob psychology. A stock may have already risen to a level that is appropriate to the company’s worth by the time an analyst recommends it, but a trader’s charts measure the effects of new buyers piling in as the price of the stock rises to unsupportable levels. Traders hope to take advantage of this rise, and get out before the inevitable return to hard reality. Traders also know that their approach often fails, but they seek to balance their losses with a few big wins, so they need to exit their losing positions quickly. Donald Trump is a trader. His bankruptcies do not matter; they were just him monetizing the quick losses, while pursuing the next big win. In this game, it does not matter who gets hurt on the other side of a trade.
Investors are different. The real world matters to them, even if they don’t exactly live in it. They seek to find investments that are worth more than their current market price, and then hold them for as long as it takes for reality to catch up. The viability of a product and the financial health of a company are important to them. Peter Lynch once made investors in his Fidelity Magellan fund very happy with this approach, and Warren Buffet has become very wealthy this way. In politics, investors understand that safety net programs are vital to the long term health of the country. Where a trader sees the people of this country as competitors for a finite set of resources, investors see each person as representing a long term value to the nation, even if it takes a generation or more to unlock that value.
In a political campaign, traders offer short term solutions that may seem wonderful if you don’t look at them too closely. They can vilify political investors, knowing that they offer an easily visible quick fix, in contrast to a slow developing investing approach that solves nothing in the near term. In eight years, the full benefits to society of Obamacare had not had time to play out, making it easy for the Republicans to run against it. Political investors such as Hillary Clinton can also lose track of the fact that most Americans do not and can not actively participate in the market at all. To her, the status quo established under Obama was fine, just needing more time to play out. She could not appeal to those who needed not just health insurance but health insurance they could actually afford to use. She was asking for patience, while Trump was offering someone to blame for the time things were taking to get better.
It comes down to this. Would you rather buy a stock that should be worth twice its current price, but may take years to get there? Or would you rather buy a stock that a star analyst says will double in six months, even if it currently sells for more than the company is worth? It is the job of corporate Democrats to sell us the first stock instead of the second. It is the job of Republicans like Paul Ryan to get us to ignore any misgivings and buy the first stock. There is hardly anyone in Washington who will speak for those who can’t afford to actively play the market at all. That is actually most of us, and our laws would look very different if we were also considered. Ironically, the times when we have been considered, with policies such as the New Deal and the Great Society, have been very good times for the stock market. There many good reasons for this, but they may be the subject of a future post.
I really could only see one choice for this week’s song:
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