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This is a segment from The Breakdown newsletter. To read more editions, subscribe. “It infuriates me to be wrong when I know I’m right.”  — Molière US equities returned to their all-time highs this week despite all the worrying politics: tariffs, Fed-bashing, the BLS drama. Or are markets up because of politics? A new research paper finds that a high level of political disagreement is predictive of positive returns for stocks. The authors used a large language model to create 216 “virtual investors” with differing political and social views, asked them how they’d react to years of stock market news, and found that the stocks sparking the most disagreement delivered better returns. This explains a lot: Disagreeing about politics is at an all-time high, so maybe it makes sense that stocks are, too? If so, there should be many more gains to come. Another academic study found that “many partisans interpret factual questions about economic conditions as opinion questions,” and that they answer such questions accordingly. This also explains some things: Economists despair that people’s views of the economy are increasingly just a function of their politics. As it turns out, that’s because they think questions about the economy are about politics. When the researchers offered a monetary incentive to answer the questions factually, the responses got much more accurate. Perhaps that’s what happens in markets, as well: Prices fall on the initial wave of disagreement, then rebound as the drop incentivizes people to revisit the facts. But this isn’t a case of clear-eyed professionals taking advantage of biased retail investors — another study finds that even the pros are misled by their politics. “Republican-affiliated forecasters project 0.3-0.4 percentage points higher growth when Republicans hold the presidency, relative to Democratic-affiliated forecasters,” the researchers found.  “Forecast accuracy shows a similar partisan pattern:…

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Filed under: News - @ August 8, 2025 9:26 pm