Market focus on political events only seems to heighten at the ‘last minute’
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A lot of usually smart market traders and analysts get dumbfounded when it comes to political impacts and developments. Former Federal Reserve Chairman Ben Bernanke said he is “puzzled” by markets ignoring political risks, with market focus on such events heightening at “the last minute.” It’s tick-tock time.
US equity markets are faltering as revelations continue to create headwinds for the Trump administration’s agenda in Washington, including the firing of FBI Director James Comey and reports that Trump relayed classified information to Russian diplomats have shaken what have been optimistic markets relative to the potential for changes that would benefit businesses and the US economy.
“It always puzzled me a little bit,” Bernanke in Las Vegas according to a recap of the event from MarketWatch. Financial markets have long shown a tendency to be “blasé” about political risks until the “last moment,” he noted.
Bernanke noted financial markets largely ignored the fiscal-cliff situation a few years ago and last year ignored uncertainty tied to Britain’s vote to exit from the European Union until it actually happened. He noted the current market situation may reflect a view that Trump is just one part of the US government and has only a moderate impact on growth. Plus, he pointed out the global economy is improving.
As for low market volatility, Bernanke said that was “a little puzzling” since there are “plenty of risks in the world.” Citing work by economists Robert Shiller and John Campbell that indicated markets overreact to news and show more volatility than a given event might suggest. The market view may reflect a global perspective that recognizes the president is only one part of the U.S. government and has only a moderate impact on growth while the global economy overall is doing better, Bernanke said.
Regarding Fed policy, Bernanke said there are a host of differences between the situation with the Fed discussing the next steps for its massive $4.5 trillion balance sheet and when he sparked the “taper tantrum” in 2013 when he mentioned the potential for the Fed to stop its bond buying effort. That situation, he said, was linked to a market view that rate hikes then were going to be in the offing. Since the Fed has indicated that it could ease up on the pace of rate increases when it begins to adjust the balance sheet essentially amounts to the Fed divorcing the balance sheet issue from rate expectations.
Comments: Bernanke is publicly talking about something we have seen over the years— traders and others in the market tend to only focus on policy when forced to. Their optimism on the prospects for the Trump administration and Congress to deliver tax, infrastructure and other changes helped drive markets higher, including the Dow tying its shortest 1,000-point rise. But now that the policy shifts that markets apparently had “bet” on happening could be in jeopardy, they are being forced to focus on policy in a climate that few observers, let alone traders, have ever seen. The ongoing revelations in Washington are reaching a point where, as markets are reflecting, the policy agenda for this administration and the Republican-controlled Congress is far from assured.
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