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What Would A Bear Market Mean Politically?

[ Posted Thursday, October 11th, 2018 – 17:56 PDT ]

I am often (quite rightly) accused of writing nothing short of crassly political columns, where I examine events and trends seen through the lens of how they will affect the political landscape without much regard for their overall impact on society. Today is certainly going to qualify, I'll state that, right up front. Because after the Dow Jones Industrial Average has fallen almost 1,400 points in the past two days of trading, it's hard for a pundit not to wonder what it would mean if this trend continues.

Now, I am not a professional market analyst, not by a long shot. My 401K can attest to this fact. So I have no real clue about what will happen next -- a strong comeback because stock prices are now so low, a "dead-cat bounce" where the market appears to revive, only to soon head downward again, or a full-fledged panic attack by investors. I simply don't know what the future will bring.

As of this moment, we are not yet in a "bear market." Definitions differ from expert to expert, but most of them define a bear market with some respect to time -- stocks head lower for two (or three) months, perhaps. Some also include a percentage qualification, the most common being that the stock market slides at least 20 percent in value over this period of time. We are nowhere near either one of these right now, because (1) it's only been two days, and (2) because the Dow was so high, even a 1,400-point drop is only a little over five percent of the market's total at its high. So even if the market continues downward, we've got a long way to go before professionals start talking about bear markets.

The other definition worth considering is a "market crash," which can loosely be defined as a large drop which happens in a very short period of time. How large such a drop must be to qualify is open to interpretation, but once again, we are not there yet.

But no matter what the experts decide to call it, a sharp downward trend in the stock market is politically significant right now because the midterm elections are less than a month away. If the market quickly recovers, of course, then this entire column will have proven to have been nothing more than meaningless speculation, because the political atmosphere will likely just return to where it was before the market headed downward. As Emily Litella would say: "Never mind."

If, however, the trend continues, what will the political effects be? This is also pure speculation, because nobody really knows. There are historical examples to consider, but it's impossible to tell whether things will play out as they have in the past or not.

Generally, professional poll-watchers have a rule of thumb that states: "economic trends do not matter to the outcome of elections when they happen too close to Election Day." Definitions of "too close" differ, but some put this event horizon out as far as two months before people vote. If the economy goes through large changes (for the better or for the worse -- either way) in the summer, then voters will consider this when they cast their ballot. If the general feeling of how the economy is doing changes significantly enough, it will affect the overall outcome of the vote, in other words. If the country's in a recession and things turn sharply upwards in August, then people feel better about the future in November and will vote accordingly. The converse is true as well -- if a sharp downturn happens this early, then people will be more pessimistic about the future when they vote. This rule of thumb takes into account how long it takes for economic news (good or bad) to be accepted by (or even directly felt by) the general public. It takes a while to percolate, in other words.

The flip side to this coin is that voters generally don't take into account any drastic economic changes if they happen too close to Election Day. If the market crashes one week before the election, then it probably won't change many votes. The voters' choices at that point are pretty much baked into the cake and can't be easily shaken.

The nebulous part of this conventional political wisdom, however, is the question of: "How long is long enough to have an effect?" We are now slightly less than four weeks from the midterms. If the market continues to sharply drop over the next two or three trading days, will that allow enough time for the public to react enough to actually change their minds about their vote? It's an open question, really, and it might wind up depending on what the market does for the rest of the month.

The biggest question, though, is what a continued slide would mean for the two major political parties. This is an easier one to predict, given the fact that Republicans are in charge across the board. The "in" party almost always bears the brunt of bad news, because "it happened on your watch." This usually has little or nothing to do with what is actually happening with investors and the market, but it's pretty much a given that presidents (and to a lesser extent the party that controls Congress) reaps the benefits of good economic news and shoulders the weight of bad economic news.

Donald Trump, of course, won't be on any ballots this November. However, he has been taking all the credit for the continued good economic news, as presidents always do (to be fair). So how will he react to bad economic news? Given his proclivities, he'll probably try to shift the blame to someone else -- anyone else -- because in his mind he is never to blame for anything, ever. But that'll be pretty hard to do, because Democrats (obviously) have had absolutely nothing to do with what is happening, and the Federal Reserve chair isn't exactly a juicy political target.

The overall political impact of a big (and continued) market downturn might depend on what the economists pin the blame on among themselves. As is true with most sudden movements in the stock market, few of the experts actually saw this one coming. Since they couldn't predict it, their analysis of what caused it will of course be just as suspect. But the market's "herd mentality" extends to what the experts agree is the root cause for big changes, so we'll have to wait and see what they settle on for this one.

Politically, of course, much hay can be made over the market because any given politician can spin things however they want, and their explanations will probably make just as much sense to the average voter as the experts' opinions. This will be true both in the short term (until the midterms happen) and the long term (into next year). So let's take a look at how each party will likely try to spin things.

Republicans will be flailing around for an explanation that doesn't somehow implicate them, their policies, or Donald Trump. This will be hard to do, seeing as who has been in charge for the past two years. But they'll certainly make the effort, one assumes. If I were a Republican strategist (shudder), I would try making the case that: "The market is freaking out because everyone is predicting a big Democratic victory in the midterms." Investors fear Democrats taking control of even just the House so much that they're pulling their money out now, while the getting is good. This, obviously, is a weak case to try and make, especially in the short term. "Don't change horses in midstream" is a tried-and-true political slogan, but it's usually deployed when things are going well, not when things are heading south. In the short term, this will likely not convince many voters to change their minds and vote Republican instead of Democratic, so it probably won't have a whole lot of impact on the midterms.

However, this could bear some fruit for Republicans in the longer term, depending on how long the downturn lasts. If it becomes a sustained bear market or even heads the country into a recession, then Republicans will be sure to make this case, confident that the public will largely forget exactly when it began. "Look what happens when the voters give Democrats control" will be a prominent refrain from Republicans if they lose the House or the Senate. How well this works will likely depend on how long the downturn lasts and how severe it turns out to be.

Democrats, obviously, have a much easier case to make, both in the short term and in the long term. In the short term, they will likely point to two culprits for why the market tanked: Trump's trade wars, and the Republican Congress exploding deficits by handing trillions of dollars to Wall Street and the wealthy. The trade war explanation will probably be the stronger of those two. Republicans have already seen their support in rural states and districts begin to ebb over Trump's tariffs, which are hurting a whole lot of farmers out there in the hinterlands. Voters there are already leery of where all these tariffs will eventually leave them, and a stock market crash will merely add to their anxieties. It's doubtful they'll suddenly decide to abandon Trump and vote blue, but it certainly could affect turnout as people decide it's just not worth the effort to vote this time around. So in the short term, this could help Democrats, especially in some of those red-state Senate races.

In the longer term, this could certainly affect Trump's own approval rating. Nobody likes being president when things turn bad, for obvious reasons, but so far Trump has not yet been tested in this fashion. How will he react? What will his economic team decide to do? If it turns into a real crisis, will Trump be able to handle it or will he just lash out at everyone in sight? Again, Democrats will have a fairly easy case to make that this is all Trump's fault, because they've got history on their side. In the long term, Democrats can say: "When a Republican is president, they almost always tank the economy, and it takes a Democrat to come in and clean up the mess," and they'll have a very strong historical case to make. This could help them as far out as the 2020 election (which, lest we forget, will begin the day after the 2018 midterms).

Donald Trump has a pathological problem with taking any sort of blame for anything, of course. So it is entirely to be expected that he'll try to avoid all the blame this time around as well. But if the conventional wisdom does settle on "it's Trump's tariffs" as the reason for the market downturn, then he's going to have a hard time avoiding the blame. If this turns out to be the case, however -- especially if it means Democrats win big in November -- then it might just motivate him to cut a trade deal (any deal) with China much sooner. If everyone is pointing to Trump's China tariffs as the culprit, then Trump can "solve" the crisis he created, and then brag about how he "saved the country" afterwards. This is standard Trumpian behavior, it is worth pointing out. But such a move likely won't come soon enough to help him in the midterms. It may help him politically in the longer term, but not in the immediate future, in other words.

Democrats have one risk in all of this, however. They absolutely cannot be seen as "cheering on" a market downturn or recession. Politically, that's a non-starter, because then Republicans can accuse them of "wanting America to fail." So any political argument Democrats make absolutely must be made "in sorrow, not in joy" (as it were). Democrats need to be seen as standing up for the little guy against Trump's disastrous trade policies rather than popping champagne corks every time the market sinks lower. This, however, should be fairly easy to avoid for all but the most inexperienced politicians on the Democratic side.

In a way, Democrats may have gotten lucky at the timing of the market's downturn (assuming it continues for at least a few months). Even if they win big in the midterms, they won't be sworn in until January. If you assume (as I do) that economic trends often have very little to do with day-to-day politics, then you can see that a bear market which starts now would be a whole lot better for Democrats overall than one that began in, say, February. In that case, Trump would absolutely try to hang the whole thing around Democrats' necks, and he'd likely convince a whole lot more people in the end. But a downturn which begins before the midterms even happen means Democrats will easily be able to avoid the blame, since they are not now in control of anything in Washington.

There are simply too many unknowns to make any sort of accurate predictions at such an early date, though. The market may well recover quickly. Even if it doesn't, it may have happened too close to Election Day to change many voters' minds about their choices. Either Republicans or Democrats could win the battle for public opinion as to the root cause of the downturn. And, longer term, nobody knows how it will all play out -- Trump could even cut a deal with the Chinese and then claim to have saved the day. But even with all that uncertainty, it's pretty obvious that should the downturn actually continue into at least next week, it'd be very hard to make the case that this is a good thing, politically, for either Donald Trump or the Republican Party. That's the flip side of claiming political credit for good times -- when times turn bad, you also get the lion's share of the blame. Sometimes you ride the bull, and sometimes the bear eats you -- that's just the way these things usually go.

-- Chris Weigant

 

Follow Chris on Twitter: @ChrisWeigant

 

12 Comments on “What Would A Bear Market Mean Politically?”

  1. [1] 
    Elizabeth Miller wrote:

    It is frightening to know that the next financial crisis could happen before Trump is out of office.

  2. [2] 
    Don Harris wrote:

    If the Republicans convince me the Democrats were responsible for the destruction of the stock market it would be a reason for me to vote FOR Democrats.

    That is not because I want America to fail.

    America has been failing for many and/or most Americans while the stock market has been succeeding for some Americans.

    It's time to separate the speculators from the investors by taxing dividends at the current rate and taxing profit from selling stocks based on how long you hold the stock.

    Less than a year, tax at 90%. 1 year to 2 years 80%, etc. to a minimum of 25 or 30%.

    There wouldn't be all the excitement of the massive up and downs, but stocks would be valued for the profits and dividends of a company rather than speculation on whether or not the price of stock is going up or down.

    Why should we reward people with a special tax rate for speculation? It has no benefit for society in general.

    Are any Democrats or anyone proposing anything like this?

  3. [3] 
    LeaningBlue wrote:

    [1]: Yeah. I wish Cohn were still around. And a bond guy like your boy Geithner.

    I don't know that there are enough people around there who really understand how the whole thing is wired together.

    I'm not too worried though, until it becomes clear that the corrupt Commies who run the PRC can't keep a lid on their mess.

  4. [4] 
    Don Harris wrote:

    Well, CW, I think you have officially speculated about how everything could affect the political landscape except for one.

  5. [5] 
    Elizabeth Miller wrote:

    LB,

    I don't think there is anyone on the planet that knows more about fighting financial fires.

    Of course, he also pretty good at putting in place regimes to prevent them, too - despite his many faults.

    I don't even think the Trump administration would know enough to even call him in should they ever have to deal with another financial crisis.

    I'm still very worried ...

  6. [6] 
    Paula wrote:

    I think talk about the "great economy" has rung hollow to most Americans - that's been true for the last several years. Most Americans aren't directly affected by the Dow Jones Industrial Average fluctuations, etc. - not in the way they're affected by gas prices and food prices and fees and tiny raises and low wages.

    A friend of mine went to Kentucky a few weeks ago with a writer-friend of hers who was working on a story about feral horses. When there she discovered that something like 60% (she was told) of the kids in the county she visited were living in foster situations as a result of the opioid crisis. She also said they learned the majority of the children in the area ate one meal a day, at school. The poverty she saw appalled her.

    I write periodically about people being "comfortable". The "comfort-line" starts where people have enough money to be able to pay their way out of problems. Below that line people are forced into trade-offs. Above the line, your car has a problem, you get it fixed and nothing else about your life changes. Below that line, your car has a problem, and to fix it you have to give something else up because you don't have the extra money available.

    The comfort-line varies from place to place - it's relative to lifestyle and costs in a given area. But the difference in how life feels above the line versus below the line is stark. Some of the intriguing people running for office right now - like Stacy Abrams in Georgia, have lived below that line.

    The number of Americans who have fallen below that line has been rising year after year after year. Search google for "Americans living paycheck to paycheck" and you'll seem claims articles with statistics ranging from 35% of Americans to 78% of Americans! Additionally less than half of Americans have sufficient savings to meet emergencies. Virtually nowhere in America can a single person afford an apartment if they work full-time earning minimum wage. Etc.

    My point relative to this column: a market downturn is likely to affect voters above the comfort-line not those below, for whom such things are essentially meaningless. The downturn may affect folks in ways they don't notice or grasp (market misery trickles down in a way that market flourishing does not) but the struggle feels the same no matter what the cause.

    But people who drive media discourse live WAY above the comfort-line and it will all seem very significant to them. As with so much of media discourse, inordinate attention will be paid to the fears of the comfortable classes while, all around America, more people will kill themselves on drugs and more children will go hungry.

  7. [7] 
    Elizabeth Miller wrote:

    Paula,

    You make many very salient points. Which should form the thinking that goes into the Democratic message for 2020.

    I'm thinking that the economic part of that message has to take into account those living below the comfort line without slamming those who live way above it.

    Democrats must find better phrases such as the extremely loaded “shared wealth” if they wish to attract a healthy majority of Americans. The concept of economic inequality and practical solutions for it need to be better explained using words that everyone can relate to. And, Democrats need to own their share of the blame for the situation and demonstrate that they have actually learned something.

  8. [8] 
    Balthasar wrote:
  9. [9] 
    Elizabeth Miller wrote:

    That will get Democrats safely defeated, Balthasar.

    I'm hoping the last presidential election taught Democrats that a run-out-the-clock strategy is no strategy for winning.

  10. [10] 
    Balthasar wrote:

    Elizabeth,

    I have no idea what you're talking about. There's no run-out-the-clock strategy in place anywhere.

    The time for Democrats to 'find better phrases' is long past as well, now that "the game is afoot".

    And the game is 'souls to the polls'. It's a turnout contest from this point on. Folks are already voting.

    Sure, we'll see a lot of ads in these next few weeks - every last minute convert will help - but these will be 'closing arguments' for the most part, and in some cases, desperate appeals - the equivalent of long passes into the end zone.

    Don't expect uniquely clever appeals to be delivered during this time. We're all just hoping that our favorite candidates have the least annoying political ads. The rest is really up to us.

    .

  11. [11] 
    Elizabeth Miller wrote:

    Balthasar,

    I have no idea what you're talking about. There's no run-out-the-clock strategy in place anywhere.

    That is the strategy that doomed Hillary Clinton's final attempt to win the presidency.

  12. [12] 
    Elizabeth Miller wrote:

    By the way, I was talking about the presidential campaign in 2020, not the midterms.

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