October 2025
The interplay between politics and economics has never been starker. We have an American President who is doing more to stick his nose into the affairs of those that are supposed to be at arms length than any of his predecessors ever dreamed. Despite this, people who offer commentary on both the economy and capital markets (they are separate things) act as though what’s going on on Capitol Hill is so unremarkable that they conspicuously fail to work any acknowledgement of the dysfunction into their commentary.
Last week, I sat in on a webinar hosted by Jeff Schulze, CFA, who is managing director, head of economic and market strategy for Clearbridge Investments. In his presentation, Schulze noted that the S&P 500 is currently trading at 23 times forward earnings and that only the late 1990s saw a higher number. He added that there has been recent downward pressure on the federal funds rate and opined that the ‘one big beautiful bill’ will offer further fiscal stimulus down the road. In a dashboard of 12 indicator variables, only one was flashing red (recession). Four were yellow (neutral) and seven were green (expansion). He went on to opine that corporate profits don’t look recessionary. He concluded that a near term recession is unlikely. I’m not disputing his economic evidence I’m simply noticing that there was not a word about political implications or developments. That silence strikes me as conspicuously odd.
There are many smart people who look closely at all manner of economic indicators who also look the other way regarding politics. As if they are not related. Why is that? They don’t talk about what’s going on Capitol Hill at all. The topic is taboo. It’s “polarizing”. Some even allege it’s beyond the purview of their mandate. I disagree.
The efficient market hypothesis (EMH) posits that capital markets do an excellent job of digesting all available information (from all fields of endeavour) quickly and accurately. By synthesizing information into a consistent worldview, EMH implies that no one can reliably ‘beat the market’ through security selection or timing strategies. The economic forecast offered by Clearbridge seemed predicated on the assumption that what’s going on in Washington is normal, but it also seemed predicated on market inefficiency since Schulze made multiple references to the need for active management. If the market is efficient, then it is already reliably taking the dysfunction in Washington into account. If, on the other hand, it is inefficient, then the vagaries of an unpredictable President stand out as being meaningful and should be noted. So if the conduct of the President is a meaningful consideration, why wasn’t it mentioned by a guy who implicitly rejects EMH?
I cannot help but notice how utterly abnormal things are when looking at the current state of American politics. We have a President who is openly engaging in political retribution (the most recent of which is the ridiculous indictment of John Bolton), a governing party that engages in active gerrymandering and the suppression of votes, and a cabinet full of sycophants who have no compunction to use truth as a consideration when offering commentary or developing policy. Americans also live in a world where the mass firing of senior civil servants who oversaw data that would ordinarily be relied upon in making economic decisions and monitoring economic developments has left a vacuum that has been filled by systemic disinformation.
In 2023, I released a book called Bullshift, which explored how the financial services industry shifts people’s attention to make them feel bullish. In it, I observed that political leaders (i.e., those in power) and financial advisors shared a common modus operandi. Both are determined to keep people feeling good about the future – at almost any cost – because it’s good for their careers. South of the border, we have a President, press secretary, and cabinet that talks a fantastic game about prosperity while simultaneously withholding the information that would allow fair minded people to judge for themselves. When Schulze opened the floor and asked the thousands of financial advisors from around the world who were sitting in on the webinar to opine on whether the American economy will go into recession in the next 12 months, 64% voted no and 36% voted yes. In my view, that straw poll offered clear examples of confirmation bias, motivated reasoning and Bullshift. If for whatever reason you are unconcerned about high valuations relative to historical readings, you might ask yourself if you are also unconcerned about what’s going on politically. Markets have climbed a wall of worry for over 16 years now. Some people will say that markets can remain irrational for longer than you can stay solvent as an admonition against timing. What I’m trying to point out here is not so much about timing as it is about applying a critical lens of political developments that are unfolding in real time and the impact they might have on your portfolio. If high valuations are not your portfolio’s undoing, Donald Trump’s ongoing lunacy may yet be the catalyst for a market downturn that many have feared. It hasn’t materialized yet, but many political commentators also think Trump is just getting warmed up. My view remains that stocks are generally risky right now, but that American stocks are extremely risky – for two reasons.