The events of the last three weeks unleashed a tornado that could change Washington forever and upend political orthodoxies that have shaped economic policy for decades. Investors hate uncertainty. But even as questions swirl around President Joe Biden’s viability atop the Democratic ticket — and despite any fear of the possible damage that former President Donald Trump’s tariff and immigration policies could do to the U.S. economy — markets show no indication of concern. Even the shooting at Trump's rally last weekend had little bearing. In the past, those events “would have sent shockwaves” through Wall Street, Jeffrey Sonnenfeld, a professor of management at the Yale School of Management who regularly consults with top U.S. CEOs, told MM. That hasn’t happened. Dealmakers are bullish that merger activity will accelerate soon — particularly with Federal Reserve interest rate cuts likely coming in September. Inflation is easing. The labor market is healthy, but softening. The consensus among big bank executives and analysts is that the economy is slowing down but sound, according to this week’s earnings calls. “This is an anomalous time,” Sonnenfeld said. To steal a phrase from Donald Rumsfeld, the uncertainty that sent Washington into convulsions is largely composed of “known unknowns” for investors. Scott Wren, a senior global market strategist at Wells Fargo Investment Institute, warned clients this week that it would be a “bad idea to make meaningful portfolio adjustments based on who you think is going to win the upcoming election.” Polls aren’t always a reliable indicator, Wren wrote. Policy priorities can shift depending on congressional leadership and intraparty conflicts. The state of the economy offers a “clearer signal for an investor than trying to predict the eventual market impact of any election.” (That doesn’t mean investors won’t react to political news. The Nasdaq dipped on Thursday after semiconductor stocks fell on reports that Biden was weighing new trade restrictions and Trump’s commentary on the defense of Taiwan, The WSJ’s Dan Gallagher reported. The broader market selloff was largely attributed to investors pivoting away from larger cap stocks.) That markets haven’t responded more aggressively to political turmoil could be interpreted as a sign of optimism that U.S. institutions are secure enough to withstand whatever tumult is inflicted by political leadership, said Alec Phillips, the chief U.S. political economist at Goldman Sachs. If investors thought the differences between a second Trump or Biden administration — or another Democratic alternative — were substantial enough to affect the rule of law, “markets might move when [election] probabilities change,” Phillips told MM. “Everyone wants to talk about what different outcomes mean,” he added. “But the whole point is we don’t really know.” JPMorgan Chase CFO Jeremy Barnum said during a media call last week that the current environment is “no different” than any other, and that while “everyone’s talking about it … I don’t think that’s financially material in the context of earnings.” Of course, there’s a possibility that the market’s limited reaction is naive. Perhaps it discounts the tail risks of institutions like the Fed or Supreme Court becoming politicized. Geopolitical hotspots could be further inflamed. Unfavorable policy shifts could occur if the electorate grows more pessimistic about the country’s future. If those are risks, they aren’t certain or immediate. Speculating about their specific effects on markets may be a futile exercise. Consider this: In 2016, the consensus view was that Hillary Clinton would win. If Trump was somehow victorious, there was a belief that the stock market would tank. Trump won and markets soared. At the time, “the response of most forecasters was to tweak their models and promise to do better next time,” Oaktree Capital Management Co-Chair Howard Marks wrote earlier this week. “Mine was to say, ‘if that’s not enough to convince you that (a) we don’t know what’s going to happen and (b) we don’t know how the markets will react to what actually does happen, I don’t know what is.’” IT’S FRIDAY — Here’s hoping this weekend is quieter and much more peaceful. Send tips and suggestions to ssutton@politico.com and @samjsutton.
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