In-depth Analysis of the Impact of Political Stability on Market Valuation and Investor Confidence

Government political stability is one of the key factors affecting financial market performance. Combining the latest political developments and market data, I will analyze the mechanisms and manifestations of this impact from multiple dimensions.

According to the latest reports, White House Chief of Staff Susie Wiles revealed the complex dynamics inside the White House in an exclusive interview with Vanity Fair [1]. She mentioned having reached a ‘loose agreement’ with the president that there would be no retaliation against political opponents in the first 90 days, but Trump still continued to push for investigations into Senator Schiff, former FBI Director Comey, and others [1]. This internal tension reflects instability in the government decision-making process and has a direct impact on market expectations.

Based on quantitative analysis models, the impact of political stability on the market is mainly reflected through the following mechanisms:

• Positive correlation
  : Political stability index and investor confidence index show a positive correlation of 0.276
• Confidence sensitivity
  : For every 10-point decrease in political environment stability, investor confidence drops by an average of about 3 percentage points
• Behavioral performance
  : During periods of political instability, investors tend to shift to defensive assets such as gold and treasury bonds

• Negative correlation characteristic
  : Political stability and market volatility have a negative correlation of -0.290
• Volatility intensification
  : During periods of political instability, the VIX index usually rises by 15-30%
• Trading behavior
  : High-frequency trading and algorithmic trading respond faster to political news, exacerbating short-term volatility

• Valuation contraction
  : During periods of political instability, the price-to-earnings ratio usually drops by 5-15%
• Risk premium rise
  : Investors demand a higher equity risk premium to compensate for political risk
• Capital allocation
  : International capital tends to flow from politically unstable markets to more stable alternative markets

According to the latest market index data [0], U.S. main stock indices have shown differentiated characteristics recently:

• Dow Jones Industrial Average
  : +1.75%, relatively stable performance
• S&P 500 Index
  : -0.30%, slight decline
• Nasdaq Index
  : -2.10%, technology stocks are more affected
• Russell 2000 Index
  : +2.46%, small-cap stocks performed well

This differentiation reflects investors’ asset reallocation behavior under different political risk environments.

Political instability affects the real economy and financial markets through multiple channels:

Political instability may weaken the independence of central banks, leading to:

• Decreased predictability of monetary policy
• Interest rate decisions being subject to political pressure
• Increased difficulty in managing inflation expectations

Tensions within the government may lead to:

• Delayed introduction of fiscal stimulus policies
• Complicated budget approval processes
• Long-term infrastructure investment plans being shelved

• Frequent changes in financial regulatory policies
• Increased uncertainty in the business environment
• Enterprises becoming cautious in long-term investment decisions

Facing political instability, investors should consider the following strategies:

• Geographical diversification: Increase allocation to politically stable markets
• Asset class diversification: Allocate traditional safe-haven assets
• Industry diversification: Focus on defensive industries and consumer staples

• Closely monitor the political event timeline
• Use derivatives such as options to hedge risks
• Maintain an appropriate cash allocation to seize opportunities

• Focus on enterprises with strong moats and stable cash flows
• Avoid industries overly dependent on political policies
• Attach importance to corporate governance and management quality

Government political stability has a systematic and multi-dimensional profound impact on market valuation and investor confidence. The current instability inside the White House [1] is affecting market performance through mechanisms such as confidence transmission, volatility amplification, and valuation adjustment. Investors need to formulate corresponding risk management and asset allocation strategies based on a full understanding of these impact mechanisms.

During periods of high political uncertainty, maintaining investment discipline, emphasizing fundamental analysis, and avoiding emotional decisions become particularly important. Historical experience shows that market reactions to political shocks are usually temporary, and long-term value investors can often find better investment opportunities amid volatility.

[0] Gilin API Data - U.S. Main Stock Index Market Performance Data (November 4 to December 16, 2025)

[1] USA Today - “Susie Wiles tells Vanity Fair that Trump has ‘alcoholic’s personality’” (https://www.usatoday.com/story/news/politics/2025/12/16/susie-wiles-trump-vanity-fair-interview/87790848007/)