It's the elections, stupid!
Elections — not earnings — are now driving financial markets. It's about exit polls, not P-E ratios. And a major source of all that stomach-churning stock-market volatility? Blame voters.
Not convinced? Think back to Sunday. When was the last time investors spent Father's Day keeping tabs on an election in Greece?
Sure, the economy is still a major factor in determining financial security or whether investments rise or fall in value. But the outcome of key elections, such as the one last weekend in Athens and coming votes in the USA and other global hot spots, are likely to have a bigger impact on money-related issues for the rest of the year and beyond, Wall Street experts say. "Policymakers are now the primary market movers," says Drew Matus, a UBS economist. "Investors are reacting more to perceived changes to policy as opposed to pure economics."
Indeed, the trajectory of 401(k) balances, mortgage rates, home values, stock prices, Social Security payouts, tax bills and job openings — pretty much anything related to Main Street America's personal finances — will increasingly be influenced by politicians and policymakers around the globe. The influence of traditional market-moving forces, such as data on corporate profits, consumer confidence, retail sales and GDP, will wane.
The reason: In the wake of the Great Recession of 2008-09, government intervention in financial markets has reached unprecedented levels, says Andy Busch, a public policy strategist at BMO Capital Markets. The health of the global economy is arguably as dependent on government as it has ever been. The era of bailouts, central bank stimulus and politicians-turned-economic-problem-solvers has injected a new wild card into markets.
Shining the spotlight ever brighter on elections is the sheer number of elections in 2012.
Roughly 40 countries will hold presidential elections this year, including seven of the world's 20 biggest economies, according to an analysis by Daniel Clifton, head of public policy research at Strategas Research Partners. China will also be undergoing a leadership transition in the fall.
"Taken together, countries representing about half of world GDP are holding elections or switching leadership in 2012," says Clifton.
The timing of the potential power shifts is also critical. Voters from Athens to Austin and in cities such as Cairo, Tripoli, Delhi, Mexico City, Caracas, Seoul and Istanbul, will be heading to the polls at a time when a large chunk of the world is confronting serious economic challenges.
There's the European debt crisis that is threatening the existence of the euro, slowing growth in one-time global economic locomotives such as China and India, and festering fiscal problems in the USA caused by costly bailouts, tax revenue shortfalls, expensive entitlement programs and a still-sputtering economy.
Not so bullish
Elections are normally bullish, especially for stocks, as politicians looking to boost their chances of winning tend to push through policies that stimulate the economy ahead of the vote. But this year might be different. With many of the countries facing votes weighed down by heavy debt loads, all those IOUs eventually have to be paid, which may "place handcuffs" on their ability to "prime the pump" via tax cuts and spending increases, Clifton warns.