Investors are hypersensitive to politics

Posted December 14, 2018 12:44 p.m. EST

— Wall Street often ignores political headlines. Earnings and the economy are what matter most to the market. But it's getting harder for investors to brush aside what's going on in Washington. In fact, it appears investors are now hypersensitive to news from DC.

The political landscape influences the investing decisions of three-quarters of investors surveyed recently by advisory firm Raymond James.

Raymond James surveyed 1,000 US investors with at least $75,000 in the markets in August. Forty percent said that politics were either "extremely or very important."

What's more, 70% said that news headlines in general influence their investment decisions.

It also seems that a decent number of investors are following the lead of President Donald Trump, who told the Washington Post late last month that "I have a gut and my gut tells me more sometimes than anybody else's brain can ever tell me." According to Raymond James, 35% of the investors surveyed said that their emotions are "extremely or very influential" to their overall strategy.

So what happened to the notion that investors only care about hard data and beating expectations?

It seems we're now in a strange time where politicians, particularly Trump, are behaving in ways that are, to put it mildly, not exactly conventional. Trump has bashed Federal Reserve chair Jerome Powell, who Trump himself appointed to lead the Fed, repeatedly for raising interest rates.

And Trump has attacked multiple corporate leaders -— most recently GM (GM) CEO Mary Barra after the auto giant announced plant closures and layoffs.

Then there was the unusual spectacle just this past Tuesday — the public sparring between Trump and Democratic leaders Chuck Schumer and Nancy Pelosi about a border wall with Mexico and a possible government shutdown.

Politics 'playing with people's emotions'

Add all that up and you have a market that doesn't know what to think anymore about Washington.

"The political climate, no matter what side of the fence you are on, is playing with people's emotions," said Frank McAleer, senior vice president of wealth, retirement and portfolio solutions at Raymond James.

"But I'm a bit surprised that politics is playing this much of a role in the market," McAleer said.

Others agree that the political confusion is hurting stocks. Investors appear to be glossing over solid earnings and good economic reports. The jobs market is healthy. Consumers are spending.

"Policy risk is becoming more of the issue. It is overshadowing the good macro story," said Simona Mocuta, a senior economist with State Street Global Advisors. "There has been a shift in perception. People are ignoring good fundamentals because the political noise is bad."

The trade spat with China, another political issue, isn't helping either.

"There are several factors that investors are focused on, none of which have anything to do with fundamentals — such as the importance of the tariff discussions," said Wayne Wicker, chief investment officer with DC-based investment firm Vantagepoint Investment Advisers.

"Cynics would suggest that negotiations with China are unconventional and unrealistic. Politics are having an outsized impact on the markets."

Compromise on infrastructure?

That may continue for the foreseeable future. But State Street's Mocuta said that there is one glimmer of hope. She argued that it is still possible that Trump and Democrats in the House and Senate could wind up agreeing on an infrastructure bill.

If that happens, it could be good for the economy — and a rare bit of encouraging news from Washington that Wall Street would even approve.

"The saving grace with infrastructure is that it would not be just to boost growth. It would actually rehabilitate and improve existing infrastructure," Mocuta said.

"In that sense, you can't ignore the possibility that the two sides can compromise," she added. "It may not be a huge bill, but the argument is that infrastructure improvement could aid productivity and boost growth."