EC What, Me Worry?

As we contemplate the upcoming U.S. presidential election one of our chief investment related concerns is the potential for the election results to roil markets. Strangely, the equity markets trade as if the election results, be it a Clinton or Trump victory, are inconsequential for share prices. That stance is greatly at odds with what many of us think, as well as the palpable anxiety voiced by many traditional and social media outlets.  

In prior articles, including our most recent “Mm Mm Good”, we discussed economic and market distortions caused by extraordinary central bank monetary policy. In this instance we focus on a behavioral distortion that is, also, partially a result of central bank policy, actions and words.  

Bad News is Good News

The BREXIT vote in the United Kingdom was feared to have negative consequences for the financial markets if U.K. voters favored exiting the European Union (EU). As we now know, the “leave” votes won despite the vast majority of polls predicting a “stay” victory right up to the end. Following the surprising result, stock markets behaved as expected, with most markets around the world plummeting. Within days, however, markets snapped back, and after only a couple of weeks, many had not only fully recovered but some had actually risen above pre-vote levels.

This abnormal behavior is something that has become common place in the last few years. The market has coined this type of market reaction “bad news is good news”.  From both a logical and a fundamental view it is senseless, unless one considers why the market thinks bad news is good news.

In 1998 Alan Greenspan and the Federal Reserve helped bail out Wall Street and the failing hedge fund Long Term Capital Management. From that day forward, central bankers around the world have pursued an increasingly proactive approach towards steering economic growth and, more recently, financial asset prices.

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Harry Goldstein 8 months ago Member's comment

Nice article Michael Lebowitz. Yes, the Fed has historically been able to ensure the markets behave appropriately after elections, but #Trump defies historical sense. If he wins, he is a wild card.