© 2017 BY CANNON CAPITAL MANAGEMENT, INC.

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Politics and Financial Markets

June 8, 2017

 

There is plenty of attention focused on political events.  One of those political events is the public hearing in which former FBI director James Comey testified about his experience with both President Trump and Trump’s administration.  The second is the general election in the United Kingdom – an election that could have a significant impact in how the UK disengages from the European Union (EU).  So, it’s a good time to ask, “Do political events matter to financial markets?”  The simple answer is, yes! 

 

Financial markets love consistency and particularly love consistency that is bred of changes that suggest growth opportunities will expand.  For example, When the Berlin wall was torn down and the former Soviet Union was dismantled, it led to a long period of higher growth for financial markets, in part because new growth markets were opened for companies to sell their services and products.  An example of political events leading to an expansion of growth opportunities. 

 

One need look no further than the current political environment that exists in Venezuela to see the negative effect of political events on financial markets.  The less stable and unpredictable a ruling party is, the greater the demise in economic growth and productivity and in turn financial markets. 

 

The UK election will affect how Prime Minister May is able to negotiate Britain’s exit from the European Union (EU).   However, regardless of whether May’s party gains seats in Parliament or not, Brexit seems to be in the cards and will take years to implement.  While the general election is a bold move by Prime Minister May, the key question for the financial markets is will the election results allow May to govern more consistently and in a manner that promotes economic growth.  

 

The Comey Hearing is a significant political event; more so for how it affects people’s view of President Trump’s administration than from any new pieces of evidence about Trump’s obstruction of investigations.  If momentum picks up concerning Trump’s ability to lead the country, then we run the risk of political ineptitude which could in turn lead to concerns about consistency of growth – ala President Carter’s term of office.    

 

President Trump’s administration, like all those before him, came with optimism about the wonderful changes they would be able to implement to make life better for all of us.   Great Politicians learn how to compromise on certain issues so they can implement what truly matters to them.  President Trump’s party has a majority in both the Senate and Congress.  To the extent that Trump allows himself and his administration to get caught up in name calling he weakens his position to effectively lead and move forward his agenda.   The risk is that hearings, investigations and name calling increase beyond the “norm” which very well could become a drag on the ability of the economy to generate growth. 

 

The economy is trying to move forward – to do what is natural to it – grow.  Financial markets are believing that growth can continue and even accelerate.  It is important to financial markets that political events reinforce perceptions about continuing economic growth – and that is what matters to financial markets.

 

 

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