The risk of a politics-driven market

Currently the market is driven by politics as any newly released news could cause some significant impacts in the market. Politics has influence on the financial markets; however, the current phenomenon is abnormal that the volatility and the frequency are above the average. This suggests that the changes in the politics are taking place more frequently than previous and many of these changes are unexpected or not overseen by the market. In addition, politics could have very complicated impacts on the market and create very mixed market opinions as different market participants have different opinions about the impacts of some political changes.

Once the markets have such politics-driven behaviours, enormous risk is created within the market. Firstly, a wide range of different opinions in the market could make winners win more and losers lose more, which could cause a shock in the economy including the labour market and the financial market. Secondly, a wide range of different opinions in the economy could cause the population feel unsecured. Thirdly, the unclear politics is a source that causes the politics-driven market. Unclear politics guidance lowers people's expected incomes and returns in the future, as there will be more states and the probabilities of these states become close, given the general public of risk averse preferences. Fourthly, politics is more complicated and less transparent. This is definitely not a good thing for the market. Politics often has multiple goals, and politicians have to balance the weights of these different goals. Multiple goals lead to many different possible outcomes, and the whole process is not very transparent and some of these goals are not released to the public. With the lack of information, the market cannot be perfect and complete.

Overall, the risk of a politics-driven market will increase due to the imperfect information and the increased uncertainties coming from politics.