When investors try to predict the trajectory of the United States economy, they typically watch the Federal Reserve or Congress. The U.S. Supreme Court is usually viewed through a narrower financial lens, with traders focusing on how specific rulings might help or hurt individual companies.
However, as political polarization has deadlocked lawmakers in Washington, the nation’s highest court has increasingly shaped the boundaries of broad economic policy. According to a new NBER working paper, financial markets react to ideological shifts on the Supreme Court by immediately revising their expectations for the entire macroeconomy.
Economists Thomas Drechsel of Johns Hopkins University and Naixin Zhang of George Washington University found that a shift toward a more conservative Court is associated with lower inflation expectations, lower expected economic growth, and lower government bond yields. Conversely, a shift toward a less conservative Court triggers the opposite market reactions.
Pinpointing how judicial ideology affects the broader economy is difficult because changes to the Supreme Court bench are rare. When vacancies do occur, they are usually accompanied by months of public speculation and political maneuvering, making it tough to isolate the exact moment investors price in a change.
Even when that moment can be isolated, economic theory suggests the Court could pull the economy in two different directions. Justices might primarily influence “aggregate supply” by striking down or upholding business regulations and labor laws, which changes the cost of producing goods and pushes growth and inflation in opposite directions. Alternatively, the Court might mainly influence “aggregate demand” by enabling or blocking major government spending programs, which changes total spending in the economy and pushes growth and inflation in the same direction.
Measuring market reactions to sudden vacancies
To overcome the challenge of slow-moving political news, Drechsel and Zhang examined two sudden events that altered the ideological balance of the Court: the unexpected deaths of Justice Ruth Bader Ginsburg in September 2020 and Justice Antonin Scalia in February 2016. Ginsburg, a senior liberal justice, died weeks before the 2020 presidential election, leading to the confirmation of conservative Justice Amy Coney Barrett and a 6-3 conservative majority. Scalia, a prominent conservative, died during the final year of the Obama administration, eliminating the Court’s 5-4 conservative majority and leaving an extended 4-4 ideological split.
To confirm that these departures caught investors off guard, the researchers analyzed data from PredictIt, an online prediction market where users bet on political outcomes. In both cases, betting volume surged immediately after the news broke, and the market-implied probabilities of Scalia’s departure or Barrett’s nomination jumped from below 20 percent to 100 percent.
Because both Ginsburg and Scalia died over a weekend while U.S. financial markets were closed, the researchers measured the price difference between the final minute of trading on Friday and the first minute of trading when markets reopened the following week. Neither weekend overlapped with major economic data releases, corporate earnings reports, or other policy announcements. This clean window allowed the authors to observe how traders repriced assets in response to the judicial news.
Drechsel and Zhang tracked minute-by-minute prices across several financial instruments. To measure inflation expectations, they looked at inflation swaps, which are financial contracts where traders bet on or hedge against future changes in the Consumer Price Index. To measure expectations for economic activity, they examined major stock indices alongside dividend futures, which are contracts that reflect expected corporate payouts over the coming years.
Expectations for inflation and economic growth
Following the conservative shift triggered by Ginsburg’s death, market expectations for both inflation and economic activity dropped across the board. Expected annual inflation over the one-year, five-year, and ten-year horizons fell by 0.076, 0.044, and 0.033 percentage points, respectively. At the same time, the S&P 500 stock index fell by more than 1.5 percent, the small-cap Russell 2000 index dropped by more than 2.2 percent, and one-year dividend futures declined by about 1 percent.
By adjusting the dividend futures data for inflation and applying an established conversion for how corporate payouts relate to the broader economy, the researchers translated these market moves into expected real gross domestic product (GDP). They calculated that the prospect of a more conservative Court following Ginsburg’s passing led investors to downgrade their expectations for real GDP growth by 0.66 percent over a one-year horizon and 0.42 percent over a two-year horizon.
Following the death of Scalia, which reduced conservative influence on the Court, these patterns reversed direction. Expected inflation rose by 0.007 percentage points at the one-year mark and 0.028 percentage points over five years, while both the S&P 500 and the Russell 2000 jumped by more than 1 percent. Dividend futures data were not available for the 2016 window, preventing an implied GDP calculation for Scalia’s passing.
To test whether these price jumps were simply normal market noise, the authors compared the weekend changes against typical overnight price shifts during the surrounding months, as well as against a statistical forecasting model based on the prior two weeks of trading. For Ginsburg, the drops in inflation expectations and stock prices fell outside the 95 percent confidence intervals of the forecasting model. The market reactions to Scalia’s death were milder and less statistically distinct, which the researchers attribute to the fact that his passing created an evenly split Court rather than a clear liberal majority.
The Supreme Court as a source of fiscal news
The finding that inflation expectations and growth expectations moved in the same direction after each death provided the researchers with a clue about how investors interpret judicial shifts. Because inflation and growth fell together after a conservative shift and rose together after a liberal shift, the authors conclude that financial markets view the Supreme Court primarily as a driver of aggregate demand rather than aggregate supply.
The researchers propose federal fiscal policy as a plausible channel connecting the judiciary to aggregate demand. Over the past two decades, major liberal policy priorities in areas like health care, clean energy, and social spending have relied on large public expenditures. Markets might therefore interpret a more conservative Court as making it more likely that such spending programs will be constrained or struck down, reducing expected demand in the economy.
To verify this fiscal policy interpretation, Drechsel and Zhang examined U.S. Treasury bond yields. When the government is expected to spend less and borrow less, bond yields typically decline. Consistent with this logic, the ten-year Treasury yield dropped by 2.24 basis points (one basis point is one-hundredth of a percentage point) after Ginsburg’s death and rose by 3.35 basis points after Scalia’s death.
By breaking down the components of those bond yields, the authors found that the movements were not driven by expectations that the Federal Reserve would alter short-term interest rates. Instead, the yield changes were driven almost entirely by the “term premium,” which is the extra compensation investors demand for holding long-term government debt. Comparing the size of these yield shifts to prior research on federal budget announcements, the authors estimate that markets reacted to the two judicial deaths as if expected federal debt or deficits had shifted by roughly 1 percent of GDP.
Historical records from the Court’s docket and media coverage at the time support the idea that federal spending was on investors’ minds. When Ginsburg died, five pending Supreme Court cases involved major fiscal stakes, including a challenge to the Affordable Care Act covering tens of billions of dollars in annual health subsidies. Contemporary newspaper reports also noted that a contentious Senate confirmation battle would likely stall bipartisan negotiations over a new federal stimulus package.
Sector impacts and additional tests
To confirm that the market movements were tied to judicial policy priorities, the researchers examined exchange-traded funds (ETFs) tracking industries that rely heavily on government spending and court rulings. In inflation-adjusted terms, a global clean energy ETF dropped by 3.1 percent after Ginsburg’s death and rose by 3.9 percent after Scalia’s death. Similarly, a health care sector ETF fell by 1.8 percent following Ginsburg’s passing and gained 1.1 percent following Scalia’s, with both sectors moving significantly more than the broader stock market.
As an additional check, the authors analyzed the unexpected retirement announcement of Justice Anthony Kennedy on June 27, 2018. Although Kennedy’s eventual departure had been rumored, the timing was a surprise, and his replacement by Justice Brett Kavanaugh shifted the Court from a moderate swing balance to a solid conservative majority. Because the news broke during trading hours at 2:07 p.m. Eastern Time, the researchers were able to track intraday market reactions.
Over the remainder of that trading session, asset prices mirrored the pattern seen after Ginsburg’s death. Ten-year inflation expectations edged down by 0.20 basis points, the S&P 500 fell by 0.38 percent, the Russell 2000 dropped by 0.76 percent, and clean energy and health care funds declined.
The authors point out that expectations regarding federal spending are not the only possible mechanism explaining why judicial shifts move the broader market. In addition, because unexpected departures of Supreme Court justices who alter the ideological balance of the bench are extraordinarily rare in modern history, this high-frequency approach is naturally limited to a small number of events.
