Separating our politics from trading decisions

Everything appears to have become a political question these days, even whether or not you like burgers (ok, I made that one up, but hopefully you get the point). Of course, financial markets have always been impacted by politics and arguably even more in recent years, with events such as Brexit and the Trump presidency.


However, it is important we disentangle our own political views from the market and how it reacts to politics – they are two very different things. It can be tempting to conflate the two, our own political views and the market. A trader’s job is not to say what they think should happen, but what is most likely to happen given the circumstances. This can also be the case when trying to understand monetary policy, where it can be easy to make the mistake of mixing own own views about monetary policy and what they think a central bank should do, versus what the central bank is most likely to do. On monetary policy, we’ve seen this recently, with comments about easy money and the impact on stocks. Not everyone might agree with what the Fed has done, but we need to react to what they have done when trading. A trader needs to react and try to preempt moves, even if they think these central bank/political decisions were wrong.


Of course, we might complain about the current state of politics, because it doesn’t chime with our view, and to also vote on our personal political views. However, this is something totally different to trading a portfolio based on our own personal political views.


Market institution about politics is not always backed up by data too. A tweet from @BrokenBanker (using a chart from @russmould1) shows that the average rise in stocks in the first year of a Democrat presidency was 13.1% since (since 1949) and around 2.0% for Republicans, which doesn’t necessarily fit with general market narratives about which party is “good” for stocks in general.


Brexit and GBP is another good illustration. You can be a leaver, and accept that Brexit has not been a positive for GBP particularly in the aftermath of the vote. At the same time if your personal view was that remaining would have been better, you need to accept that GBP has had rallies since 2016, although admittedly it is still way off the pre-Brexit level. My point is that political views, can cloud the judgement of how political events can impact how an asset trades.


You might also have implicit biases as well, not just your own political views. One thing I’ve noticed (but never proved with data) is that people tend to be bearish their own currencies. Maybe this is the opposite of home bias when it comes to equities?


More broadly, the market can also be very quick to change its mind about the impact of political events (which is unlikely to happen with your personal political views). If we think back to Trump’s election, stocks sold off for a few hours given the surprise, before rallying and the whole reflation theme took hold for several months.


Everyone has their own political views, and that’s healthy for a democracy, where we can exercise our right to vote. However, whatever your political leanings, they might not always help you to trade.