How does the current political environment affect the stock markets?

Posted in Market, Investments, Stocks, Andrew Ross

There is an old adage that the 'markets climb a wall of worry.' This couldn’t be more true of the markets today – underneath the smoke and bluster of politics, there are some solid foundational events that are leading stock markets higher.

Recent elections in the U.S., France and the U.K., and the coming election in Germany have given some investors pause when considering the future direction markets will take. However, while some investors have paused, the markets themselves have not, and continue to grind higher

The Dow Jones Industrial average is up 11.25%, YTD as of this writing, which seems extraordinary given all of the hand wringing going on.

Let’s take a closer look at each of these four countries political landscapes to see why they might be influencing markets in such a positive manner.

In the U.S., Trump’s White House has been mired in the investigation into his dealings with Russia for most of the early parts of his term. During the first 200 days in power however, the markets have shrugged off the uncertainties of these events for a single reason. The Republicans control the House of Representatives, and this is where Trump can implement his agenda. Namely, tax reform, infrastructure spending and less regulation. All of which are music to the markets ears. There will be no repercussions for the President’s misbehaviour for the Republicans until late 2018 when the mid term elections are contested.

In both France and the U.K., the recent election results were positive for markets, albeit for very different reasons.

A positive election result for the strong, yet moderate Emmanual Macron sent French markets higher after his election win. In the U.K., a poor election showing by Theresa May meant the chances of a 'hard’ exit from the E.U. was diminished and there may even be a second vote coming on Brexit. That news had a positive impact on their markets.

At this writing, it appears that Germany will stay the course and re-elect Angela Merkel once again. Viewed as a strong leader both inside the E.U. and around the world, Merkel, in partnership with Macron of France would now form the leadership backbone the world will need with the vacuum created by Trump’s world leadership abdication.

To be sure, there are other geo-polotical forces that could influence the markets as we move towards year end. North Korea and Qatar to name two. We believe calmer heads will prevail in these situations and any negative effects on markets should be mitigated. We will be watching closely as events unfold in these areas.

In the meantime, it appears that the old adage is holding true, as markets around the world continue to climb that worry wall.

Source: Campbell Lee & Ross July 2017 Newsletter – sent by email to all clients.

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