Democracy is under attack. And Wall Street is sounding the alarm

Business leaders, investors and economists are sounding the alarm about the state of democracy in the aftermath of the 2020 presidential election.

The fear is that President Donald Trump’s efforts to sow doubt about the political system will harm the fragile recovery by causing social unrest, amplifying political division and paralyzing Washington when it needs to focus on rebuilding the economy from the worst pandemic in a century.

Longer term, the attacks on democracy could backfire by eroding confidence in the rule of law and cherished institutions that have made the United States the world’s strongest economy.

“I’m very worried,” said David Kotok, chief investment officer of Cumberland Advisors. “If there’s no trusted and stable democracy, the whole business-economic-market enterprise falls apart.”

In other words, corruption is bad for business.

Business groups are nervous enough to issue a series of statements this week about what is normally a ceremonial event: Wednesday’s counting of electoral votes by a joint session of Congress. More than 170 prominent business leaders signed a letter urging Congress to accept the Electoral College results.

Both the US Chamber of Commerce and the Business Roundtable slammed efforts to change the election outcome and urged Congress to stick to counting the electoral votes.

“With our country in the midst of a pandemic,” the Business Roundtable said in a statement, “business leaders recognize that ongoing division and distrust in our political system threatens the economic recovery and job creation our country desperately needs.”

‘Political theatrics are a distraction’

Jason Furman, a former economic adviser to President Obama, pointed out that economic prosperity requires stability.

“Business leaders are right to argue that anything that undermines America’s confidence in the smooth functioning of democracy also undermines the bedrock upon which America’s economic success rests,” Furman, now an economics professor at Harvard University’s John F. Kennedy School of Government, told CNN Business in an email.

Bridgewater Associates Founder & Co-Chairman/Co-CIO Ray Dalio speaks onstage during TechCrunch Disrupt San Francisco 2019 at Moscone Convention Center on October 02, 2019 in San Francisco, California.

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Furman said that President-elect Joe Biden and Congress should be squarely focused on ending the pandemic and restoring the economy.

“Political theatrics are a distraction that can only hurt in the short run while raising even more concerns over the longer run,” Furman said.

Of course, this is hardly the first time of elevated political tensions in US history. And the economy was able to rebound from volatile periods in the past, including the civil unrest of the 1960s and the Watergate scandal of the 1970s.

Tensions amplified by social media

Still, today’s crisis is being complicated by the growing divide between rich and poor in the United States – an inequality gap that the pandemic has worsened. And Wall Street leaders have been taken aback by the harsh rhetoric of the current moment.

“The Nixon era seems like a polite game of chess by two English gentlemen by comparison to today,” Michael Cembalest, chairman of market and investment strategy at JPMorgan Asset Management, told CNN Business.

Instead of focusing on earnings and GDP, Cembalest has been devoting ample space in his research reports to guiding nervous clients through the weeds of Constitutional and election law.

“Business leaders and investors are concerned – on both sides of the aisle – about how far the fringes will go,” Cembalest said.

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The pro-Trump fringe is being inflamed by conspiracy theories on social media claiming widespread election fraud – even though courts have repeatedly rejected those claims.

“There are almost two parallel worlds: The social media world and the actual judiciary,” said Cembalest.

Thousands of Trump supporters are expected to protest in Washington during Wednesday’s joint session of Congress. Business leaders are urging restraint.

“Small businesses, local communities and our nation pay a steep price when demonstrations turn violent and destructive, so it is critical that these gatherings be peaceful,” Thomas Donohue, CEO of the US Chamber of Commerce, said in a statement Monday.

The rule of law is being stress-tested

Corporate America and Wall Street have been on high-alert for evidence of a breakdown in the nation’s respect for the rule of law. That’s because academic research shows that countries that have a track record for strong adherence to the rule of law tend to prosper more. It’s a crucial difference between emerging markets and developed ones. And it makes sense: Investors are reluctant to plow money into countries ruled by corruption.

“When you risk the rule of law, you jeopardize the ability of society to flourish,” said Kotok, the Cumberland Advisors executive. “That is what is at stake right now in the bizarre unfolding of this election.”

The U.S. Capitol at dawn in Washington D.C., U.S. on Monday, Jan. 4, 2021. The non-stop drama of 2020 is bleeding into the first week of the new year, with a pivotal election in Georgia, promises of protests in the streets and President Trump's dragged-out fight over the November vote threatening to tear apart the Republican Party. Photographer: Stefani Reynolds/Bloomberg via Getty Images

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Trust in the court system resolving disputes leads to confidence among investors and CEOs. And vice versa. In fact, there’s a clear connection between the rule of law and higher market valuations.

“A very unorthodox outcome here could rattle the market’s confidence,” said Cembalest, adding that he set a “high” threshold beyond the objections being raised by some US Senators to the election.

The JPMorgan executive is cautiously optimistic that the country will get through January without doing lasting damage to the rule of law or the economy at large. But Cembalest expressed concern about scenarios floated in recent weeks by some Trump allies about invoking martial law or launching military tribunals to overturn the election.

“There’s certainly a line that if you cross, there’s no looking back,” he said, “such as any involvement by the military and any coordinated efforts to change the outcome through…illegal means.”

The fact that these unthinkable scenarios are even being discussed by business leaders and Wall Street executives is telling.

The post-Trump world

The hope is that after a peaceful transfer of power, the incoming Biden administration will be able to work with Republican leaders to rebuild the economy. That would be a signal that Washington is avoiding political paralysis in the aftermath of the election.

“If Biden and (Senate Majority Leader Mitch) McConnell dial temperatures down and compromise on large infrastructure bill, then the country moves on,” Cembalest said.

Kristina Hooper, chief global market strategist at Invesco, said she’s not very concerned about the economic impact of the attacks on democracy.

“This could very well be a fleeting period in American history that has little impact on the future,” she said.

Hooper predicted that the political fights this year and next will focus on how to fund the economic recovery – not whether Biden is the legitimate president.

“We’ll be relieved to have those kinds of debates because it will suggest a return to normalcy,” Hooper said.

So, that’s where we are. After four years of chaos, investors are yearning to return to the Tea Party-era spending debates that look quaint by today’s standards.