What’s Behind the US Stock-Market Disconnect?

CAMBRIDGE – There seems to be a bizarre disconnect between the surging US stock market and the sad state of American politics. Winston Churchill supposedly quipped, “Americans always do the right thing, after they have tried everything else.” But in light of the impending rematch between Joe Biden and Donald Trump in this year’s US presidential election, Churchill’s observation needs adjusting: Americans, apparently, do the right thing only after they have tried everything else twice.

What explains this disconnect between the stock market’s buoyancy and the crisis facing American democracy? The market may simply believe that the president of the United States has limited influence over the domestic economy, at least in the short term. Or perhaps investors believe that artificial intelligence conquers all.

But this interpretation overlooks the long-term consequences of possible policy decisions such as retreating from free trade (an area where Biden and Trump seem determined to outdo each other), urging the Federal Reserve to shift its focus away from inflation, and continuing on an unsustainable debt trajectory. When it comes to immigration, a top concern for voters, Trump’s restrictions would impede high-skilled immigration, while Biden’s open-border policy makes little sense.

Alternatively, perhaps investors understand that the US electorate has become so deeply divided that no president is likely to control both houses of Congress for more than a couple of years. With political gridlock becoming the norm in Washington, the Big Tech firms accounting for a large share of the stock market’s recent gains, owing to an AI boom, are less likely to face anti-monopoly regulation.

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