Politics’ Impact on the Stock Market and Economy
Diana Velasquez

Most individuals are unaware of the power political news has to sway the stock market. It is evident that it may have an influence on the economy, yet many Americans do not follow stock market indices unless they are investors or merely enjoy reading about the latest financial news. Reviewing the S&P 500, Dow Jones industrial Average and Nasdaq Composite indices can help you determine quickly whether or not the American economy is performing well. This is because most of America’s largest firms are listed in these indices. It is probable that America is entering a recession if the indexes are having a rough few months.

It is no secret that the economy does very well under a certain political party. This comes as no surprise as the Republican Party favors business owners and seeks to increase employment in order to boost the economy and the US dollar. Business owners are aware that it is simpler to grow their businesses when a certain political party is in power, and they know more people are inclined to invest in the stock market and their businesses because the economy booms. By combining resources to mobilize long-term capital, facilitating savings and investments into lucrative initiatives, and enhancing corporate governance structures, emerging stock markets have made a significant contribution to economics growth (Omar, 2022). This creates a positive domino effect for many other businesses and individuals.

During the most recent election, Americans saw the stock market decline. Politicians of different parties were elected per usual, which may have left the people unclear about where to safeguard their investments. Some politicians are in support of the actions taken by corporations, while others are opposed to them. They will put forward policies and legislation that will either help or hurt these corporations. When it is favorable, the stock will do well, as will the whole industry, including those in energy, oil, healthcare, real estate, and consumer goods.

The way the stock market moves with the news can send it through a rollercoaster, as well as some investors. When it comes to elections, it will usually move downward when several democrats are elected because of their prosperity to increase taxes with all of their proposals. They move upwards with Republicans because they propose ideas to help businesses and corporations expand which will allow them to make more profits and also help shareholders make more money. America’s debt increases for more under certain administrations which doesn’t help the economy.

The entire stock market may be impacted when it comes to new federal level laws. However, it could only have a microeconomic impact on the specific area on a local and state level. Even those who are not investors might be impacted since prices could fluctuate everywhere, as they did in the years after the pandemic. As supply and demand start to shift, companies are forced to modify their pricing for their goods and services, which has an impact on the average person’s budget and monthly expenses.

Most people are readily affected by the news, and this influences whether or not they want to continue investing in a company. Majority of large investors use private wealth management companies and financial consultants to manage their assets on their behalf. The average investor, however, is usually responsible for managing their own stock portfolio, and because they are not financial experts, they are more prone to make choices that are motivated by their emotions, which typically leads to a loss. Stock market investment decisions are both directly and indirectly affected by a market causal linkages and volatility spillover effect, which has significant value for market investors and policymakers, and this shows just how much both have in common (Bhowmik, 2022). There are many other factors involved in investing decisions, and the financial markets are first viewed as a macroscopic system that displays stochastic movement of the variables such as asset price, trading volume, or return (Gontis, 2014).

The stock market performed exceptionally well following the inauguration of the 45th President of the United States. He had a reputation of being a brilliant businessman, and as a Republican, people knew he would help the economy grow and make it simpler for companies to acquire funding allowing them to hire more people and lower the unemployment rate. These are encouraging signs that will enable businesses to increase the dividends they pay to investors each quarter of the year as they are expected to generate greater profits, which will also enable them to fund new initiatives to grow their business and be able to innovate.

The Dow Jones Industrial Average rose 56% during the Trump presidency and that is the eight-best return for any single term of a presidency (Levisohn, 2021). Calvin Coolidge, the 30th President of the United States, had the best return overall, bringing in about 26.1% per year which translates to 266% overall during his presidency (Sizemore, 2022). Calvin Coolidge supported the success of American businesses; therefore, he did everything possible to ensure that his plan for the American economy went as planned (Sizemore, 2022). The Roaring Twenties emerged as a result of his desire to see the US economy flourish.

Presidential elections are clearly more impactful than the mid-term elections as the administration, whether it be Democrat or Republican, impacts America as a whole rather than just a state. Mid-term elections mostly consist of politicians that can make changes on a state or local level; therefore, there won’t be much of a long-term shift in the market. On November 3rd, when a new president will be elected for a new term, Americans will only be able to base their decisions on what the president has promised the public. However, if the same president runs for a second term, Americans will be better able to envision how the next four years will unfold because they have already seen how the economy has performed under their leadership.

The Federal Reserve, the central banking system of the United States, is another factor that has the power to instantly plunge the market into a bear market (Dong, 2022). Every time the Federal Reserve announces a change in inflation, the stock market quickly reflects that shift by rising or falling sharply. Globally, it affects people because, although consumers may suffer increases in things such as the cost of food and gasoline, business owners will see increases in the cost of the materials and supplies their businesses depend on to operate. This is the point at which prices will start to increase because businesses need to make sure their profit margins are within a range that will enable them to continue paying their debts, overhead expenses, and employees. This year, the economy has significantly contracted after a series of 25-, 50-, and now 75-basis-point hikes were made to combat inflation. As a result, the gross domestic product has grown negatively for two consecutive quarters, meeting the technical criteria for a recession (Dong, 2022).

Mass layoffs are mostly seen among public companies as they need to keep their investors happy and have to avoid having to file for Chapter 11 bankruptcy. This allows for companies to use the extra cash to continue paying their investors and store money in case the condition of the economy worsens. Private companies, however, are not listed on the stock market and this gives them greater discretion to operate as they like. They do not need to disclose any information to the general public, but this does not mean that they are not laying off their staff. When companies begin to do this, it is an indicator that a recession is likely about to happen which can make it exceedingly risky to continue carrying on business as usual. Many changes need to be made within a company to ensure that they are not overextending themselves as that will lead them to have to shut down for good.

While there are numerous factors that contribute to the way the US economy and stock market perform, it is now clear to see that politics plays a major role in the way that things develop. Voting for the politicians that wish to bring about good change in our nation is crucial since every aspect of the government has the potential to significantly alter the economy and the common person’s life. Elected officials hold a lot of power as they are above corporations and can make changes that will require businesses to have to adjust and comply to new laws and regulations, therefore, it is important to keep up with political and financial news as an investor.

Works Cited

Barron’s. (2021) “How Trump’s Stock Market Performance Stacks Up.” Ben Levisohn. https://www.barrons.com/articles/how-trumps-stock-market-performance-stacks-up-to-other-presidents-51611150990. 

Bhowmik, Roni, et al. “Emerging Stock Market Reactions to Shocks During Various Crisis Periods.” PLoS ONE, vol. 17, no. 9, 13 Sept. 2022, p. e0272450. Gale In Context: Opposing Viewpoints, link.gale.com/apps/doc/A717391450/OVIC?u=lincclin_fccj&sid=bookmark-OVIC&xid=f05a0e92. 

Gontis, Vygintas, and Aleksejus Kononovicius. “Consentaneous Agent-Based and Stochastic Model of the Financial Markets.” PLoS ONE, Vol. 9, No. 7, 16 July 2014. Gale In Context: Opposing Viewpoints, link.gale.com/apps/doc/A418529936/OVIC?u=lincclin_fccj&sid=bookmark-OVIC&xid=94d1e7b2. 

Kiplinger. (2022) “The Best and Worst Presidents (According to the Stock Market).” Charles Lewis Sizemore. https://www.kiplinger.com/investing/602714/best-and-worst-presidents-according-to-the-stock-market. 

Omar, Abdullah Bin, et al. “Is Stock Market Development Sensitive to Macroeconomic Indicators? A Fresh Evidence Using ARDL Bounds Testing Approach.” PLoS ONE, Vol. 17, No. 10, 19 Oct. 2022, p. e0275708. Gale In Context: Opposing Viewpoints, link.gale.com/apps/doc/A723246043/OVIC?u=lincclin_fccj&sid=bookmark-OVIC&xid=432730f1. 

U.S. News. (2022) “How Fed Decisions Impact the Stock Market.” Tony Dong. https://money.usnews.com/investing/stock-market-news/articles/how-fed-decisions-impact-the-stock-market.