Investor Sentiment Follows Party Lines
Though many try, in our business it's extremely hard to ignore politics. Aside from being difficult, it can also be expensive. After all, government policy has a tremendous impact on economics, which in turn influences the global financial markets.
As we've written before, generally speaking we try to remove ourselves from our own political opinions while analyzing investments. Unfortunately, we can't ignore them completely. To do so would be to ignore one of the biggest factors impacting the investment world.
However, while we have our own opinions, we also recognize that when analyzing the current political or economic atmosphere, our opinions simply don't make a difference. This has nothing to do with whether our views align with current party in power. It is simply necessary that we understand that our own opinions are of no consequence, and we need to take an objective view of the world.
Each and every day market prices are determined by consensus. Though the market continues to reach this consensus, we have been seeing markets become increasingly divided - just like the current political situation in this country. As in Washington, people on Wall Street are tending towards extremes.
Today some argue that we are in the midst of the most severe depression since the 1930s, while others argue that we are on the verge of one of the fiercest bull markets in a generation.
It might seem strange, but these forecasts are strongly influenced by political beliefs. Beliefs, not in what politicians in Washington SHOULD do, but how circumstances will likely play out because of what's already been done.
Across history, the vast majority of the time this country is relatively centrist, politically speaking. At different times in history, though, the US can become torn between extremes. This seems to be one of those times. Further, the extreme opinions on politics are also impacting people's view of the economy and markets.
For an example of the division currently facing our country, look no further than Glenn Beck's recent rally at the Lincoln Memorial. Just as importantly, explore the differing reactions people have to that event.
It's important to understand the factors weighing on the world today, but just as important is where we go from here. Some say revolution or a second civil war. These are so unlikely that they're hardly worth considering.
Through history, while extreme opinions sometime come to dominate political or business climates, they trend always back to the center. This theory of mean reversion applies across a great deal of disciplines, from meteorology and chemistry to sociology and philosophy.
Thankfully, it also applies to economics, politics, and finance. Each of these subjects is the study of either people or the world around us, both of which have natural equilibriums that exist. Despite the occasionally extreme conditions that occur, these equilibriums tend to be sought out.