Is the Stock Market's Future More Political or Economic?

I was recently studying a collection of charts from JP Morgan (which you can view/download here), and a site that featured a study done by Professors Keith Poole and Howard Rosenthal was referenced.  I looked at their site (which you can check out for yourself by clicking here) and was intrigued by their analysis of the polarization trends in the US.  Since we have been guesstimating that the stock market's return to a bull market will more than likely wait until we get some resolution on the outlook for the upcoming election, I found the information and charts on Poole and Rosenthal's site very interesting.

Here's an excerpt from their site:

"Below is a graph of the difference between the Republican and Democratic Party means...from the end of Reconstruction through the 110th Congress. This difference in first dimension means is a good measure of the level of political polarization. By this measure polarization is now at a post-Reconstruction high in the House and Senate...

With few exceptions, roll call voting throughout American history has been simply structured. Only two dimensions are required to account for the great bulk of roll call voting. The primary dimension is the basic issue of the role of the government in the economy, in modern terms liberal-moderate-conservative...Voting in Congress is now almost purely one-dimensional - a single dimension accounts for about 93 percent of roll call voting choices in the 110th House and Senate - and the two parties are increasingly polarized.

Polarization declined in both chambers from roughly the beginning of the 20th Century until World War II. It was then fairly stable until the late 1970s and has been increasing steadily over the past 20 years...Note, however, that the acceleration is smooth and does not show a particular jump in polarization induced by the large Republican freshman class elected in 1994. Polarization in the House and Senate is now at the highest level since the end of Reconstruction. 

In addition, the percentage of moderate Representatives and Senators continues to plummet. In the House the percentage of moderates...has declined to about 10 Percent in both Chambers."

See the accompanying charts to their comments below.


We are at a fulcrum point.  The stock marekt has been sending a message since 1996, and especially since 2000, that there are massive changes that need to be implemented to keep this Capitalistic society on track.  I believe that America's polarization is as extreme as it can get, and I believe voters will hear that message.  Take a look at this chart of the S&P 500 since 1974.


From the lines that I've drawn in the chart above, I believe the real trend of corporate America is the red line that extends from that bottom in 1974.  Very obviously, the Financial Crisis in 2008 deviated greatly from that trend.  But as we know, corporate earnings are once again at an all-time high, so it is only valuation that has suffered.  Valuation is a function of prevailing investor fear, and in my opinion, I am hoping this election cycle starts America back on a balanced long-term plan to promoting maximum growth, moderate inflation, and a budget plan that allows long-term growth with moderating debt, which will reduce the latent fear since 2008.

Don Hays

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