Information Landmine

"The Americans keep telling us how successful their system is. Then they remind us not to stray too far from our hotel at night." - An un-named EU trade representative quoted during international trade talks in Denver, Colorado, 1997.

Tuesday, May 27, 2008

Political economics

Slate has a good article on how financial markets try to factor in the results of presidential elections. Long story short: it's a waste of time. In part this is a globalisation story: the economic effects of a change in government are small potatoes compared to factors like the rise of China and soaring commodity prices. But an interesting detail is that analysts also get it wrong on the small details as well. In particular:

Political market calls are conceived in sin, since most are based on the false premise that the stock market prefers Republicans to Democrats. According to Sam Stovall, chief investment strategist at Standard & Poor's Equity Research, between 1945 and 2007 the S&P 500 rose 10.7 percent annually when Democrats occupied the White House, compared with a 7.6 percent annual increase under Republicans. Those who, fearing higher taxes, sold stocks after Bill Clinton's inaugural missed out on a great rally. And those who, anticipating lower taxes, plunged into the market in January 2001 entered what has been a lost decade for U.S. stocks; since 2000, the markets of countries like Brazil and China have lapped their American cousins.


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