Markets and Politics

One of the big mistakes market watchers make is to assume that the stock market is political. This is what I call Dan Gross’ Disease. Otherwise bright people assume every bounce and tick in the market is a political pronouncement that, as it turns out, proves their side right. Larry Kudlow has the acute form of DGD.
Richard Nixon was once asked what he would do if he wasn’t president. Nixon said that he’d probably be on Wall Street buying stocks. This led one old-time Wall Streeter to say that he’d also be buying stocks if Nixon weren’t president.
The market is of course influenced by public policy. Don’t get me wrong on that. But politics isn’t about policy. Usually, the most damage is done by a public policy that’s hardly controversial at the time. Lots of people like to blame Greenspan’s low rates for the housing bubble, but those moves weren’t broadly criticized at the time. Gold was still tame and bonds yield fell. The government fully applauded lower lending standards.
Paul Krugman posts a nice jab at an old quote from Larry Kudlow saying that the stock market is a validation of the president’s (Bush) policy so the recent rally must approve of Obama. I’m not sure if Krugman believes that or is simply poking at Kudlow. With much of today’s political commentary, the snark is the point.
The assumption is that the politicians are like players on a football field and the stock market is a scoreboard. It’s really the other way around. What the politicians say and do is a better measurement of how well the market has performed.

Posted by on April 13th, 2010 at 10:27 am


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