People walk by the New York Stock Exchange (NYSE) in lower Manhattan on October 5, 2020 in New York … [+]
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Wall Street is full of smart people getting paid lots of money to make good predictions about the future. So why are these analysts so bad at handicapping politics? And fiscal politics in particular?
The basic problem, I think, is that analysts are too credulous. They have a tendency to take political posturing at face value, especially when it bolsters the case for optimism. And they have a bias toward rationality, assuming that lawmakers are more likely than not to embrace policies that make sense — eventually, at least, if not over the short term.
All these tendencies seem dysfunctional to me — and make for some bad predictions.
People Not Markets
To be clear, I’m not complaining about equity markets, which tend to be excitable when it comes to politics. We can’t always tell why markets move the way they do, but sometimes they respond pretty clearly to headlines. And those responses don’t always seem especially rational or insightful.
Consider the last few days. When President Trump declared early in the week that he was done trying to negotiate with Democrats over a COVID-19 relief bill, the stock market plunged in the afternoon. When he softened his position overnight, the market rallied after the opening bell.
In both cases, the investors acting collectively seemed to overestimate two things: (1) the seriousness of Trump’s statements, and (2) the influence that Trump wields on Capitol Hill.
On the first score, Trump’s statements about policy — and especially his legislative preferences — are often impulsive and mercurial; in my view, it’s a mistake to put much stock in them, or at least to assume that they provide any durable indication of White House intentions.
On the second (and related) point, GOP lawmakers understand that Trump doesn’t actually care much about policy. As a result, they pay lip service to his preferences but operate with wide latitude in drafting deals with their Democratic counterparts. Ultimately, the success or failure of a COVID relief package will depend more on the GOP leadership than it will on Trump.
But again, markets react to headlines, and presidents make a lot of them. That goes double for Trump, who is a force of nature when it comes to shaping the news cycle.
More to the point, markets should be forgiven when they seem excitable and even irrational in their response to political events — they are, after all, impersonal, institutional, and subject to their own short-term dynamics.
Market analysts, on the other hand, should not be so easily forgiven when they offer up facile and ill-considered opinions about national politics. We have a right to expect more from people who claim to understand Washington — especially since more than a few actually worked there before coming to Wall Street. We should hold these analysts to account.
A Good Rant
Earlier this week, someone did exactly that. Jake Sherman of Politico unleashed an epic rant on MSNBC regarding the misplaced optimism of many Wall Street analysts regarding a COVID relief bill.
Sherman acknowledged that a bipartisan deal for such a bill has always been theoretically possible. Democrats want a package worth about $2 trillion, and Republicans want one worth something like $1.3 trillion to $1.5 trillion. It’s not hard to imagine a mathematical compromise. And indeed, many Wall Street analysts had been predicting one.
But Sherman was scornful of that simplistic, wishful thinking.
“I don’t care if Wall Street analysts, who largely know nothing and don’t understand the political landscape, say, ‘Oh, there’s a number in the middle,’ — yes, of course there’s a number in the middle,” he complained. “There’s always a number in the middle of two numbers. That number was impossible to reach because of political dynamics.”
Sherman covers Congress for a living, so he knows a thing or two about those dynamics. But Wall Street does not. “Markets are woefully uneducated about Washington,” he said.
Sherman noted the same seesaw reaction I described earlier: After slumping on news that Trump was done negotiating a comprehensive COVID relief package, markets rallied when he endorsed a series of smaller, more targeted bills.
Oh, no, bad news — time to sell! Oh, wait, good news — time to buy!
The (over)reactions were all so credulous and facile. Markets — and market analysts — should have seen it all coming. Administration officials had been talking about an a la carte deal for months, Sherman said. Anyone paying attention would have known about that possibility from the start.
The real route to compromise, in other words, had never been through some sort of simplistic mathematical averaging of GOP and Democratic proposals. It was through this sort of piecemeal approach.
But of course, Wall Street missed that fact. Because Wall Street doesn’t understand politics.
“This is idiocy,” Sherman summed up. “It’s unbelievable that people are in charge of money who don’t understand the basics of legislative politics.”
Sherman isn’t wrong. This week’s COVID roller coaster is just the latest example of Wall Street’s subpar political handicapping — its credulous approach to Washington posturing that tends to exaggerate the ups and downs of every political debate.