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Tuesday, October 2, 2012

Investor Assessments of Political Events

Although the various investors in the financial markets doubtlessly pay great attention to important political events, such as were a state in the E.U. to default on its bonds, I suspect that market analysts overstate the importance of more commonplace political events. For example, the New York Times reported in late September 2012 that investors were shifting their portfolios to reduce risk out of uncertainty regarding the upcoming American elections and the ongoing negotiations in Congress to avoid the huge budget cuts and tax increases set to begin automatically at the beginning of 2013 and run for a decade. Additionally, fears that E.U. leaders might hesitate on moving forward with the bailout program oriented to indebted states were prompting investors to be more risk-averse. Generally speaking, analysts were “anticipating that politicians may not act until forced,” both in the U.S. and E.U., “setting the markets up for weeks of angst.” In my view, this account is overstated.
“Right now, we’re much more defensive than we were a few weeks ago,” Martin Leclerk of Barrack Yard Advisors said at the time. He had shifted 20 percent of his company’s assets to the safety of cash. More broadly, investors were cashing in their gains, according to the Times, “on riskier stocks and moving into bonds and safer stocks, like consumer discretionary companies that are not as susceptible to a downturn in the economy.” Rather than presume that all this stemmed from uncertainty regarding the American elections or even the anticipated budget sequestration of the U.S. Government and the E.U. bailout program, I submit that the investors were taking a general reading of the global economy to assess how much economic growth would be likely in 2013. In this regard, the announcement by the Chinese government of stimulus spending is more significant than who wins what offices in the U.S. or whether the E.U. officials are really hesitating on Greece and Spain. The minor presidential election drama fueled by an all-too-innocent media and even the manipulatory threats by E.U. leaders as if jockeys bending the whip to get Greece to pony up rather than lax off are both dwarfed in financial importance by assessments of how the world economy as a whole is likely to do. Specifically, the question is whether the lower growth in China will be tolerated by government officials, and if so, whether that growth would be enough to offset the sluggishness in the E.U. and U.S. The U.S. economy in 2013 would not likely hinge on which party wins the White House because the other party typically has a veto in the U.S. Senate thanks to the ubiquitous filibuster. In the E.U., hesitations should be read more as efforts to manipulate certain recalcitrant state governments than as serious attempts to scuttle the bailout program. Elections do matter and programs do change, but the trajectory based on the status quo has such tremendous gravitational pull that even mandates tend to get watered down by the time they get implemented.

                                                                                                          Does expertise on these make one an expert on politics?  
Therefore, I suspect that the market discounts political “news” that you and I are presented with as “important” and “vital.” Often times, the importance is magnified in order to sell ads. The world economy is remarkably steady-state, and wise investors undoubtedly take a long-term perspective rather than allowing themselves to become ensnared by the titillating excesses fomented by the media. To be sure, jolts such as the effect the financial credit-freeze in September 2008 had on world trade do matter in terms of contractions in the world economy, and investors are smart to become more risk-averse in anticipation of such periods. Even so, a near collapse of the global financial system can be distinguished from which corporate party wins the White House in a certain election cycle or how an internal tiff among E.U. leaders (or states) gets resolved. My point is simply that elections are not usually the beginning of major course changes (and I am not even sure those have such a bearing on the economy as a whole), and that squabbles in the E.U. do tend to get resolved somehow or other. Neither "event,"  therefore, is earth-shattering even if it makes for good television. I suspect that investors know this and discount the white noise accordingly.


Nathaniel Popper, “Fearing Fiscal Cliff, InvestorsCash In and Seek Safety,” The New York Times, September 28, 2012.