Forget Politics - This Is Why Stocks Are At Record Highs

To many people, particularly those who are not fans of the current U.S. President, the strength of the current rally is a mystery. They look at the failure to pass a healthcare bill, the tax plan that was really a wish list rather than a basis for legislation, and destabilizing inconsistency in foreign policy and wonder how on earth we got to record highs in the stock market.

They point to comments like that made by the President yesterday, that he is seriously considering breaking up the big banks, that are simply shrugged off by a buoyant market and brace themselves for a big drop. Each day that passes without that drop mystifies them even more, but, put simply, they are focusing on the wrong thing.

It would be incorrect and probably stupid to say that politics have no effect on the economy. Obviously fiscal policy is set by Washington and, over time, that is one of the major factors that influence the broader economy. The key phrases here are “over time” and “one of.”

It takes time for policy changes to have an effect, whether good or bad, and while that time passes, there are many far more important factors influencing the strength of the economy and the profitability of U.S. corporations. Focusing on politics and possible effects in the future has led some people to ignore what is going on in the real world right beneath their noses.

One of the greatest strengths of the American economy is that it has shown time and again that it can grow and prosper regardless of politics, and that is what is happening now. Depending on which political party you support, you can look at the last eight years when those on the red team were telling us that we had a President more hostile to business than any in history, or the last three months of what the blue team sees as bluster and failure. Whichever you chose to focus on, the S&P 500 has been gaining ground in spite of politicians.

This morning we received some insight into why.

Before the market opened this morning Mastercard (MA) released their results for the first quarter of 2017. They reported earnings of $1.01 per share on revenue of $2.73 billion, both of which beat estimates and represented significant year on year growth. That, following on Visa (V)’s similar first quarter, tells us more about what is going on in the global economy than any amount of tweets from the White House.

Mastercard and Visa combined account for the vast majority of card transactions, whether debit or credit, around the world. Their growth is therefore really the best indicator we get of global consumer sentiment, and the reluctance of consumers to spend has been a major factor in sluggish growth to this point in the recovery.

Again, depending on your political allegiance, you may see that as the fault of one side or the other, but in reality it is simply a function of the nature of the recession. A credit crisis forces most households to deleverage and discourages purchases on credit. The fact that business is now booming at both MA and V shows us that consumers are finally beginning to loosen the purse strings, and that is what is driving stocks to new highs.

The continued growth in e-commerce and the fact that the effective global duopoly is intact make both MA and V attractive stocks, but there are risks. Bitcoin and other virtual currencies that enable fast, cheap transfers of funds pose an existential threat to card companies in general, for example. For now, however, the credit and debit business is booming and that, rather than anything coming out of Washington, explains why stocks are booming too.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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