Can Bad Politics Boost Stocks?

The old Wall Street saw says you’re supposed to buy when there’s blood in the streets.

But I have to ask — do you have the guts to pull the trigger?

Think back to a couple of recent market bottoms…

Were you buying stocks in spring 2009 when it looked as if the whole world was falling apart?

Were you a buyer in late 2011 after Europe hit the skids?

Few can answer “yes” to these questions. That’s understandable. During times of crisis, it’s all too easy to get sucked into the negative feedback loop. It takes incredible confidence and foresight to buy when others are fleeing the market in droves.

It’s no secret that the market’s been stuck in one of these anxiety-ridden cycles for years now. The suits in Washington have fumbled every pass since the credit crisis, injecting historic levels of stress on businesses and citizens. Record spending, health care reform, the debt ceiling and a fiscal cliff standoff are just a few of the uncertainties we’ve all endured.

Luckily, a research group called Economic Policy Uncertainty has quantified these concerns. And when you line up the spikes in the U.S. Policy Uncertainty Index (times when “business uncertainty over government policy” was at its highest), you see how policy worries led to long-term buying opportunities:

High Levels of Government Uncertainty Spur Market Rallies

Since 2009, we’ve waded through a river of political dung of historic proportions. Political ineptitude has sparked record anxiety in the uncertainty index, culminating with an off-the-charts reading during the 2011 debt ceiling dispute. Current readings continue to hover above historic spikes from the first Gulf War and the Sept. 11 terrorist attacks.

Despite looming all-time highs, blood is still very much in these streets. The lost decade is slowly (and sometimes painfully) coming to an end.

Greg Guenthner
for The Daily Reckoning