Do Judges Move Markets? Ideological Shifts in the Supreme Court and Macroeconomic Expectations

This paper studies how judicial ideology shapes financial markets' expectations about the macroeconomy. We use unexpected deaths of U.S. Supreme Court Justices as quasi-experimental shifts in the Court's ideological balance. High-frequency asset price responses reveal how markets perceive the macroeconomic consequences of these ideological shifts. We find that a more conservative Court is associated with lower inflation expectations, lower real activity expectations, and lower bond yields. A shift towards a more liberal Court induces the opposite responses. The finding that inflation and activity expectations respond with the same sign suggests that markets revise their expectations about aggregate demand, rather than aggregate supply. Moreover, contrasting the yield responses with estimates from studies of fiscal policy news indicates that a more conservative (liberal) Court leads markets to expect tighter (looser) future fiscal policy. We validate our quasi-experimental setup with sectoral asset price dynamics, such as high-frequency responses of clean energy and health care stocks. Taken together, our findings are consistent with markets interpreting changes in the Supreme Court's ideological composition as news about future fiscal expansions or contractions.