Why Politics Matters to Investors

How much do politics matter to investors? It turns out, quite a lot. The intersection between what happens in Washingington D.C. and a subsequent impact on Wall Street is quite significant. Traders tend to notice the big issues , but often overlook the subtler factors.

One of the reasons I had very aggressive mid-year targets (since December) was the expectation that the White House would succeed in passing some sort of Social Security privitization. Note that this wasn’t an endorsement of that scheme, but rather, a
recognition of the impact of an additional $200 billion+ in fund flow
each year into equities.

For a variety of reasons — poorly articulated strategies, public comfort with the present guaranteed insurance, intuitive recognition of people’s own poor performance as investors, and a lingering sense  of being misled on Iraq — the sales pitch failed.

Once it became clear that passage was not a likelihood, I reduced my midyear targets.

click for larger graphic

Source:  WSJ

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When I occasionally veer into the political sphere (as an independent, free market  libertarian), the emails start coming in. I have long  been "accused" of being a Conservative by my Democratic friends, and a Liberal from my Republican friends.

I am neither: I am a pragmatic investor. That means eschewing dogma for practical results. But it also means watching what happens in D.C., because it does have an impact on the nexus on so many factors that impact various asset classes.

Anyway, here’s the dissection of how the SS plan died from the WSJ (Graphic via the NYT):

Congress’s Republican leaders, convinced they are staring into the jaws of defeat on overhauling Social Security, are scrambling for an alternative approach to President Bush’s top domestic priority that would allow him — and them — to seize some measure of victory.

In coming weeks, the separate efforts of Senate Finance Committee Chairman Charles Grassley and House Ways and Means Committee Chairman Bill Thomas will determine whether even that is possible, numerous Republicans say. What has become clear after months of meetings with Republicans on their respective panels, however, is that their packages won’t include Mr. Bush’s proposal for personal accounts carved from Social Security payroll taxes and may not meet his demand to keep the program solvent.

The two plans are still emerging but have several common concepts. Both would reduce future benefits for all but the poorest workers, much as Mr. Bush proposes. Both would raise the retirement age for full benefits, contingent on increases in Americans’ lifespans. Both want to avoid raising payroll taxes.

But both chairmen have given up on finding enough Republican votes, in the face of Democratic opposition, to pass Mr. Bush’s proposal to let workers born in 1950 and after divert a third of the 12.4% Social Security payroll tax to private accounts, in return for reduced regular benefits. With Republicans including House Speaker Dennis Hastert of Illinois balking at having to vote for unpopular benefit trims, Mr. Bush’s demand for "permanent solvency" for Social Security also is increasingly unlikely to be met."

The bottom line is that politics, as distasteful a subject as there is for those of us with a quantitative/technical bend, significantly impacts markets. We see it in obvious issues such as tax policy and Social Security — but its also in subtler areas, such as market sentiment and structural issues like the current account deficit.

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Source:
Republicans Revisit Social Security Strategy
As Overhaul Prospects Dim, Lawmakers Consider Alternatives To Salvage a Partial Victory
JACKIE CALMES
THE WALL STREET JOURNAL, June 17, 2005; Page A4
http://online.wsj.com/article/0,,SB111896894746162181,00.html