Reasons People Are Happier about the Economy When Their Party Is in Power

Are people more apt to believe that things are going great with their finances if the current leaders of the county’s politics align with theirs? Does this make a difference in your view of the economy?

A recent study that was posted in the publication Journal of Financial Markets, indicates that people’s overall optimism toward the economy and the stock market is very much influenced by their political party affiliation and the existing political climate in the nation. 

Praising the Ruling Party

When a person’s favorite party holds power, that person tends to be much more optimistic in their view of the economy. Investors will pump more of their money into very risky bets, and show a preference for a high market beta, value and small-cap stocks, claim the scientists. And they often show a lower inclination to invest in local stocks.

“The political identity of an individual is an important source of her degree of optimism towards the U.S. economy, ” according to these researchers. “Republicans are less optimistic about the domestic economy when Democrats are in power and, similarly, Democrats grow less optimistic about the economy when Republicans come to power.”

Polls Support the Study

In addition, an Economist/YouGov poll that was taken recently indicates just how true that really is. Even a year or so ago, and after very similar unemployment job report numbers are being reported, Republicans still viewed the economy in a very negative light. According to a July 2016 poll, about 48% of all Republicans claimed that the economy was going badly, and just 6% had a positive viewpoint. And in an August 2017 poll, about 42% of all Republicans view the economic news as mostly positive, and just 13% felt that the news was not good.

Amazingly, about 5 times as many Republicans can recite the jobless rate reported today as compared to the less than 5% who knew it one year ago. This is the very same metric that was considered as a “poor” indication of the health of the economy. Today, there are only 17% of all Republicans who won’t trust it. 

With the Democrats, the reverse is partially true. Joblessness is  a major concern of 10% more Democrats than it was in 2016.

Why do these shifts happen? Scientists claim investors will become more bullish over domestic markets and the overall whenever their preferred party has the power because they will be apt to agree with all economic policies that are being approved and implemented, and they feel a lot more confident that their party will can improve the welfare of the country. This sort of shift in optimism can greatly influence their views of risk and reward. This viewpoint greatly affects all decisions they will make regarding investment and also how well their portfolio will be doing.

“In particular, because of their increased optimism levels when their own party comes to power, individuals are more likely to believe that financial assets are undervalued and would produce superior future performance,” claimed the researchers. “Those individuals may also perceive the markets to be less risky and would therefore exhibit a greater willingness to hold riskier portfolios.”

Scientists look at the examples that an investor could increase their overall risk and exposure of their portfolios whenever their preferred party is ruling. In other words, they “may overweight stocks with higher market betas and exhibit a stronger preference for riskier small-cap and value styles.”