Politics and the Stock Market

Tobin Smith
In our global economy capital is fluid and its movement instantaneous. Because that capital seeks a home where it is most appreciated and best rewarded, decisions and laws that affect capital formation and future profits move stock prices virtually every day.

In the U.S. and most democratic countries, economic policy starts at top — that means the elected President/Prime Minister. Economic policy is a fancy word for how attractive capital investment is in one country versus another.

The economic decisions and policies put forth by the Chief Executive of a nation (corporate tax rates, investor tax rates, capital formation regulations, to name just a few) have broad impact on equity valuations. For decades data has shown a direct correlation between high levels of freedom and high stock market valuations.

Homeland stability and security is another political component of stock market valuation. Not only does capital flow to where it is most appreciated, it also goes to where it feels most safe. In a post 9/11 world decisions and policies about national defense, immigration, homeland security and related issues are a new and vital part of investor calculus about risk versus reward.

In the short term the stock market is mostly a mood indicator of short-term traders. In the long term the market is a weighing machine, measuring both current and future levels of economic activity and corporate profits. And perhaps the biggest aspect to the game of economic forecasting is correctly judging the winds of policy and politics.

No investor can afford to ignore the economic impact of the political decisions made with the countries where the corporations you invest in are domiciled.

The recent destruction of billions of wealth in the stock of Yukos (the giant Russian oil and gas company embroiled in a war of words with Vladimir Putin and the Kremlin) is just the most recent example of a wonderful investment opportunity spoiled by political trauma.

This weekend our Business Block has much more on how politics affect YOUR investments. Tune in Saturday 10am — noon ET.

Tobin Smith is a contributing market analyst for FOX News Channel and is a regular panelist on Bulls & Bears, FNC's highly-rated weekly investment program. Read Tobin's full bio here.