Understanding politics from a financial lens

Earlier in my career I used to treat politics as background noise until my deals got materially impacted and halted when Trump implemented tariffs. It was clear that politics was not just background noise but one of the most direct and immediate inputs in how capital is priced, where money flows and what risks investors are actually taking. You don’t need a political view to see all of this but just have the ability to understand the implications of politics into pricing and sentiment, and adjust strategies accordingly.

In this article, we will explore the interconnection between politics and finance using real world examples (without taking any sides and purely for educational purposes!).

Why politics and finance cannot really be separated

Governments set the rules of the game. They control tax policy, trade policy, regulation, public spending and indirectly also the cost of money through their relationship with central banks. Each of these feed into how companies earn, how consumers spend and how investors value assets.

When governments raise tariffs, the cost base of importers increases. When central banks cut rates, the discount rate used to value future earnings changes. When regulators approve or block a deal, billions of dollars of value gets impacted overnight. It is not just ideological but mechanical, real-time impact.

The challenge for investors is not whether politics matters but it is around figuring out which political signals are noise vs. which ones will truly impact the cash flow.

Example: Trade Policy and Bond Market

A vanilla example is the US tariff change.

In April 2025, after the introduction of reciprocal tariffs, the bond market reacted sharply. The yield on 2-year treasury notes rose by as much as 0.3 percentage points in a SINGLE DAY marking the biggest intraday swing since 2009. The administration paused the tariffs days later. Officials acknowledged that the bond market’s reaction had influenced their decision.

The opposite happened earlier this year when the Supreme Court struck down most of the global tariffs. The bond market reacted again with 30-year treasury yields rising because of concerns around an expansion of deficit.

What is worth noting here is that in both cases bond investors were not favouring any side but rather adjusting their risk of higher inflation, larger deficit and unpredictable trade flows.

Example 2: Growing overlap of the State and the Market

A second pattern emerging is how the line between the government and corporate decision-making is blurring with time.

According to Lazard’s 2026 geopolitical outlook, Washington’s combination of economic interventionism and transactional dealmaking has reshaped the relationship between state and market, with governments now acting as major players in the corporate arena rather than just being a reference. This is not unique to the US. EU-China tensions, Chinese industrial overcapacity in EVs, wind components, solar and semiconductors are all examples of governments shaping market outcomes literally directly.

For investors, this matters in a very practical way. Sector calls increasingly depend on which industries governments choose to subsidise, protect or restrict. Defence, semiconductors, critical minerals and energy transition technologies are all sectors where policy is now as important as fundamentals.

Example 3: Central Bank Independence

Another live example is the question around central bank independence. Through 2025, public pressure on the US Federal Reserve to cut interest rates introduced a new source of unease in the markets with concerns about less independent Fed weighing on sentiment even as Wall Street welcomed the prospects of lower interest rates.

The point is not whether the Feb should or should not have had cut the rates but the point is that markets care deeply about the process by which monetary policy is set. Mercer’s 2026 outlook flagged the appointment of a new Fed Chair as a key concern which has raised questions about monetary independence and legislative gridlock.

Institutional credibility has a price. When markets begin to doubt it, they demand higher yields to compensate for the risk.

Example 4: Elections as Market Events

Once upon a time elections used to be discrete events with only short-term volatility in the markets but that is now changing. Wellington’s geopolitical strategist has highlighted that domestic politics are likely to play an “outsized” role in foreign policy throughout 2026 with US midterms in November and many other elections on the 2026 calendar. In the UK, the rise of Reform’s popularity and pressure on Starmer to leave has already been started weighing in the bond market with yields rising.

Again, this is not a judgement on what political direction is better. It is a recognition that the direction of political change, in whichever direction it goes, is now a measurable input into how assets are priced.

How to Read Politics as a Financial Analyst

If there is one habit I am trying to build over the past couple of years, it is to read political news through three filters.

The first is the cash flow filter. Does this policy change what companies earn, what they pay in taxes or what they spend on inputs? If yes, it is likely to matter and if not, it is probably just noise.

The second is the rates filter. Does this affect inflation expectations, deficits or central bank credibility? These are the levers that impact bond yields and hence they impact the discount rate applied to every asset on earth.

The third is the risk premium filter. Does this make investors more uncertain about the future? Higher uncertainty means higher rate of return is needed which leads to lower asset price all else being equal.

Final thoughts

Politics is not a side conversation in finance. It is one of the main conversations. The most useful thing an investor or analyst can do is observe political developments with the same discipline they apply to earnings reports i.e. without enthusiasm, without outrage and without picking sides.

That objectivity and neutrality is harder than it sounds especially in the world where political opinions feel like part of your identity. But for anyone serious about understanding markets, the cost of importing political emotion into financial analysis is high. It clouds judgement, narrows the questions asked and often leads to worse decisions.

Markets do not care which side wins. They care about what gets done.

Disclaimer: This article is written purely for educational purposes. It reflects my personal observations of publicly available information and does not represent the views of my employer. Nothing in this article should be interpreted as financial, investment or political advice, Investing involves risk. Readers should conduct their own research or consult a qualified financial professional before making any investment decisions.

Sources: Lazard 2026 Geopolitical Outlook, BlackRock Geopolitical Risk Dashboard (Mark 2026), Bloomberg, CBS News, PBS News, Wellington Management, Mercer Economic Outlook 2026, Rabobank Global Outlook 2026, Morgan Stanley.