Politics continues to affect sentiment

The end of the last election cycle has done little to lower political partisanship or ease tensions between the two major parties. Pew Research data shows that the unfavorable opinion of Republicans by Democrats, and vice versa, is at historic highs. Party affiliation has long impacted people’s views of and confidence in the economy, though the increased polarization has driven this to extremes over the last three administrations.

During the Obama administration, Democrats were substantially more confident in the economy than Republicans, as measured by the University of Michigan’s consumer sentiment index. This reversed sharply during the Trump administration; sentiment of Republicans flipped positive virtually overnight after President Trump took office, while Democratic sentiment suddenly soured. At the end of 2019, Republican consumer sentiment was 119 versus 76 for Democrats, a 43% gap.

This trend has continued during the first six months of the Biden administrations. As of July 2021, Democratic consumer confidence has surged to 99, while Republican confidence has been nearly cut in half to 64. The gap between Democratic and Republican confidence currently stands at 34%.

Neither partisan opinion can be correct. Reality is never as good as it feels when you’re winning, and it’s never as bad when you are losing. But political sentiment can impact investment decisions, which always leads to mistakes. Trading on emotion is rarely wise, but trading on political emotion is potentially catastrophic.