Bernie's Wall Street

In every country, national and international politics play key roles in the development and sustenance of the economy. Geopolitical conflicts have long been a source of financial crises. The institution of OPEC is a clear example of the way political conflicts over oil can cause swings in the stock market and, hence, the overall economy. Many financial analysts forget to include such analysis in their reports, and investors should be wary not to do the same. The presidential election of 2016 may have major implications for fiscal and monetary policy in the near future. Because the stock market and its assets are supposed to include expectations for future business conditions, investors should recognize that certain fluctuations and trends can be affected by political events. The Iowa caucus, and potentially the New Hampshire primary, are two events that have the potential to add volatility to U.S. and global markets already in turmoil.

Instability could be further augmented by the continued success of Bernie Sander's so-called "political revolution." His agenda filled with hefty government programs, lofty increases in the minimum wage, and verbose calls for equality reminds some voters of a socialist, and not all of them are mad about it. In the Iowa caucus, the oldest presidential candidate won the state's 17 to 29-year-old voters by about 70 points. For perspective, President Obama won the same age group by 43 points in 2008, and when on to win the entire election. On the other hand, Hillary Clinton was the favorite of 45+ voters taking a significant chunk of her support from Sander's own age group. The implications of these specific numbers reach beyond the 2016 election; instead, they represent a fundamental generational change in what is called Generation Y.

This Generation Y, which has been seduced by a suave grandpa-like figure offering more in wages and less in debt, is the same one that survived the financial crisis of 2008 and the Great Recession's economic apocalypse. They are riddled with student debt and low-paying, unskilled jobs, circumstances Sanders can take advantage of for extra votes. So is this just a convincing, articulated senior citizen an appealing political figure or an actual paradigm shift in the way this generation thinks? The large amount of young people that have turned up to vote for Sanders shows their support for his radical policies, and his talk of a political revolution suggests a deep-rooted desire for change. The generation, who has felt so trampled by Wall Street and the economic beasts higher up on the food chain, finally has a voice. The implications for the political establishment and the economy are already hurting Clinton who has been hurt by her ties to big cooperations and a tamer view on regulation.

A look at a graph of the S&P 500 and Bernie Sander's poll ratings may describe some of the forces behind his support. In 2015, large cap stocks were relatively flat in the first half of the year as Sander's support grew steadily to about 25%. In late August, the stock market saw its first major drop in the past year when the Chinese economy revealed its first hints of weakness. Curiously enough, polling data for the Democratic candidate shoots up in the following month to over 40%. Televised debates, the only major public events which could have spurred such an increase, were not scheduled until the month of October. The recognition of further economic weakness, as well as tragic interest rate policies from the Fed, could have played a part in what looks to be a reaction to stocks plunging. Young voters, in college, grad school, or in search of a job, respond to these stressful sentiment changes quickly because of social media and the financial headlines. Bernie's support remains in the 30-40% range in te polls through the end of the year. In January, the market takes another turn for the worst and the poll ratings jump to 49.6% where he falls short to Clinton in the Iowa caucus. The chart shows support for Sanders in all age groups, but the young voters have comprised a majority of his following throughout the campaigning season. The trend represents a growing aversion to the private sector that was formally represented by the Occupy movement, protests on Wall Stree that were largely organized by young adults.

Over the past 30 years, the Federal Reserve has been radically changed by this wave of anti-"financial establishment" feeling. The Fed Chair has transformed from the deregulated Greenspan era to the calculated administrations of Bernanke and Yellen with the Dodd-Frank Act looming in the highlight reels. The young consumer and tentative investor are fed up with establishment government dealing with the greed on Wall Street. Voting for Bernie Sander's gives them the direct message they want to send. Hedge funds and individual investors might be receiving these messages with a small amount discounting present in XLF (S&P Select Sectors Financial Services) from the overall market. A positive trend for Bernie Sanders would spell disaster for investment and commercial banks with "Too Big Too Fail" labels that could become toxic. A Sanders administration would be anti-Fed and anti-big bank. Support for his plan to reinstate Glass-Steagall would turn into chaos on Wall Street. Stock prices would drop and capital markets (like the commercial paper market) might experience a jump in prices threatening an already unstable economy.

While holocaust-like symptoms are unrealistic, an increase in uncertainty surrounding that industry and, in turn, capital markets, is almost guaranteed. The Generation Y that supports Bernie Sanders has a new idea of equality, income equality, that differs greatly from the opportunity equality Generation X demanded. Increases in taxes and fewer perks for money managers are ideas with which the majority of youngsters in Iowa would agree. Because of the candidate's value of honesty, the financial services industry would be forced to deal with more transparency and government regulation as retribution for the crisis in 2008. His policies will bulk up the public sector with plump budgets supplied by higher tax revenue. While those tax dollars would appear to recycle back into the economy, a burst of government expenditures would only have short-term benefits as it crowds out necessary business spending. In the end, discounting of stock prices would not only be evident in the financial services sector but throughout the equities market as a whole. Investors cannot underestimate the rise of Bernie Sanders and his implications for the political economy. Socialist policies may be more welcomed than usual by the crowd he's attracting.


Popular posts from this blog

FactSet Earnings Insight: 2019 First Quarter Earnings in Review

FactSet Earnings Insight: 2019 Second Quarter Earnings in Review

Update on the Belt and Road Initiative