Politics may be tearing the country apart, but stocks are loving it


The stock market is thriving on political strife.

The Federal Reserve Bank of Philadelphias Partisan Conflict Index which tracks political disagreements via keyword searches of U.S. newspapers has spiked since the presidential election that swept Donald Trump into the White House. It hit a record in March and remains elevated at unprecedented levels, hovering at 201.10 in May.

In the seven months since Trumps upset victory, the S&P 500 SPX, -0.81% has rallied 13%, the Dow Jones Industrial Average DJIA, -0.46% soared 15% and the Nasdaq COMP, -1.61% advanced 19%.


Ned Davis Research

The interaction between the Partisan Conflict Index and the stock market may seem counterintuitive, but it is similar to other gauges of economic and political uncertainty that show stocks have risen at a faster pace when anxiety has been high, said Ed Clissold, chief U.S. strategist at Ned Davis Research, in a report.


Historical data show that when the index is above 100, the S&P 500 has gained at an annual rate of 11.7%, compared with 5.8% when it is 100 or below, according to Clissold.

Indeed, political rhetoric, which tends to serve mostly as background noise, has reached a cacophonic crescendo recently as a nation divided along cultural, social and economic lines takes to the streets to protest and vents its frustrations on social media.

And Trump, who had inspired a record-setting rally in stocks with promises of business-friendly regulations, is finding out just how wide that chasm is as he stru ggles to navigate the convoluted dynamics of Washington. In a big blow to his agenda, Republicans on Tuesday postponed a vote on a controversial health-care bill until after the July 4 holiday due to insufficient support, despite enjoying a majority in the Senate.


Clissold believes the stock market tends to outperform during periods of extreme political conflicts, as partisanship helps to prevent the government from passing any legislation that is deemed counterproductive.

The strategist also suggested that the index behaves like a sentiment indicator.

High levels of partisanship could contribute to pessimism, allowing the market to rally when fears (usually) prove to be unfounded, he wrote.

Clissold may have a point. In contrast to the widespread worries ahead of Nov. 8 on what Trump as commander-in-chief could mean for the U.S., the stock market soon embraced Trumps presidency and his pro-growth policies, carrying major indexes to mu ltiple peaks.

But the resilience of the stock markets rally and investors faith in Trump will soon be put to test as the Republicans scramble to secure support for the health-care bill, which is a crucial stepping stone toward the much-vaunted tax reforms.

There can be no tax cuts without first getting health care out of the way, according to David Joy, chief market strategist at Ameriprise Financial, as the impact on the budget will not be known without the passage of the bill.