US partisan conflict is at historically high levels, but the market doesn't care

New York

THE United States is so sharply divided that political consensus appears to fray almost daily. Yet two truths about politics can be demonstrated with hard numbers.

The first is that partisan conflict doesn't just seem to have become more intense this year: It has reached new levels of nastiness. The second is that the stock market simply doesn't care. In fact, the rising acrimony has been a fine environment for stocks, though possibly detrimental to the economy itself.

Nearly everything is quantified these days: how much we eat, how frequently we exercise, how much time we spend glancing at a Facebook post or reading an article. In the age of Big Data, why not measure trends in political vituperation?

The Federal Reserve Bank of Philadelphia is doing just that. It maintains a monthly Partisan Conflict Index, building on the work of Marina Azzimonti, formerly a research economist with the Philadelphia Fed and now an associate professor at Stony Brook University. The monthly index peaked in March and remains at historically high levels.

"The long-term trend is pretty impressive," Prof Azzimonti said. "And it's safe to say that this year, partisan conflict in the United States has reached an all-time high."

She also created an annual historical index that begins in 1891 and continues through 2013. Both indexes use a common methodology - searches in newspaper databases that measure the frequency of "articles reporting lawmakers' disagreement about policy", as she explains in her academic article, "Partisan Conflict and Private Investment".

Despite periodic spikes around elections and specific political battles, conflict generally declined from 1891 until the early 1920s, remained fairly stable until 1965 - the year that the landmark Voting Rights Act was signed into law - and then began a long climb to its current stratospheric levels, she has found.

One striking discovery is a clear "rally 'round the flag" effect: Conflict ebbed in the early crisis of the Great Depression, in World War I and World War II. But contentiousness increased in the 1960s, accelerated during the Great Recession and leapt during the debt ceiling crises and health care battles of the Obama administration.

It catapulted to previously unexplored levels with the election of President Donald Trump and kept moving higher, the monthly Philadelphia Fed index shows.

"You might not have expected that, with both branches of Congress and the presidency controlled by the same party," Prof Azzimonti said. But the kinds of conflict measured by her indexes require three basic ingredients: disparate political preferences or views; the power to block or obstruct; and constraints, usually fiscal, that cause political eruptions. All of those are abundant now, she said.

The widespread shock among many Democrats when Mr Trump won the election in November appeared as a spike in the monthly index. "I thought the index would go down after the election, but that's not what happened," she said.

Instead, the index rose further after Mr Trump issued widely contested executive orders on travel and on undocumented immigrants, she said, and the continuing emotional battles over the Affordable Care Act have intensified conflict.

What's more, she said, fiscal constraints mean that even if the Trump administration and Republicans in Congress pivot toward the relatively popular goal of tax reform, the partisan conflict thermometer is likely to stay elevated.

"The index picks up conflict over fiscal issues, and since the Great Recession, with debt levels so high, it's not easy to just cut taxes," she said. "A tax cut, even a simple one, raises questions about expenditures. What spending are you going to cut? Medicaid? Not without a lot of conflict."

Her econometric models suggest that increased conflict is associated with slower economic growth, perhaps because partisan conflict leads economic decision-makers to defer productive risk-taking. But she can't prove cause and effect. "Correlations, yes, we see them, but causation is difficult to pin down," she said. "I hope that others will pursue that."

One thing is clear, though: The stock market has gone on one of the greatest bull runs in history despite rising levels of partisan conflict. Ed Clissold, chief US strategist with Ned Davis Research Group, and Alex Sun, a market analyst with that firm, pointed out in a recent note to clients that stocks tend to rise more rapidly when the Partisan Conflict Index soars.

The title of their note was: "Stock Market to Politicians: Keep Arguing." Why the market disregards partisan conflict is far less obvious. One possibility is that political dysfunction translates into gridlock, which Wall Street has long been said to favour (though the data indicates that is only true with a Democrat in the White House and Republicans in Congress).

Another plausible explanation is that the Partisan Conflict Index is a sentiment indicator, and stocks often rise when negative sentiment is contradicted by facts such as strong earnings. It may also be the case that stock-friendly factors like the low interest rates set by the Federal Reserve are overwhelming the effects of partisan conflict.

Prof Azzimonti says she can't explain it. "We economists don't really understand the stock market," she said. "I certainly don't. I'm the worst trader in the world." NYTIMES