OCTOBER 2025 | Politics Makes Great Theater
Geopolitics in general, and trade policy in particular, have triggered stock market volatility for as long as markets have existed. So it’s not surprising that since the election last November, we have seen politically-driven market volatility on several occasions. The most dramatic came in April, when President Trump’s “Liberation Day” tariff announcement fueled a 10% drop in the S&P 500(1*) over a two-day period. More recently, on October 10th, the S&P 500 and Nasdaq(2*) had their worst day since April – down 2.7% and 3.6%, respectively – after the President again threatened tariffs on China. His comments followed China’s announcement of tighter controls on rare-earth exports vital to many defense and high-tech industries. In both cases, markets rebounded quickly once the rhetoric eased.
The current U.S. government shutdown has dominated recent headlines, prompting many clients to ask how such events might affect the markets. While we can never know for certain, history offers helpful perspective. The chart below shows market reactions during prior occurrences.(3*)
As the chart details, during the last 21 shutdowns the market has moved just 0.3% on average, and has never declined more than 4.4%. While this time could certainly be different, history suggests that political theater rarely drives long-term economic or market performance.
So what does drive stock prices? In our view, over the long-term stock prices are driven by earnings growth, as the chart below suggests.(4*) According to the data, over the past 20 years the correlation between price and earnings for the index has been 0.94, quite close to a perfect correlation of 1.00.
Given our expectation, therefore, that stock prices will follow earnings growth, the obvious question becomes, “where are earnings headed?” Earnings growth in the U.S. tends to be driven by consumer spending, as this accounts for nearly 70% of GDP, as shown in our final chart.(5)
Consumer spending, in turn, depends largely on employment. When people feel secure in their jobs, they are more confident and apt to spend. The current unemployment rate is 4.3%, which is near historic lows. Given this constructive backdrop, we remain positive on the earnings outlook - and, by extension, the long-term trend in stock prices.
We certainly don’t mean to suggest politics are unimportant. There are obviously far more meaningful challenges both at home and abroad than the direction of the markets. But as investment advisers, our focus here is to highlight the fundamental indicators we monitor in an effort to identify appropriate investments. One lesson we have learned is that while headlines often drive short-term market gyrations, economic fundamentals drive long-term investment returns.
— Brad Dinsmore
1. The S&P 500 Index is a market-capitalization weighted index that includes the 500 most widely held companies chosen with respect to market size, liquidity, and industry. Investors cannot invest directly in an index.
2. The Nasdaq Composite is a market-capitalization weighted index that includes almost all stocks listed in the Nasdaq stock exchange and is heavily weighted towards companies in the information technology sector. Investors cannot invest directly in an index.
3. Chart Source: https://ycharts.com
4. Chart Source: https://www.factset.com
5. Chart Source: https://fred.stlouisfed.org
