The tariff shock in April offered investors a glimpse of the risks linked to weak governance in a key country. Since then, stock markets have reached new highs, yet market participants remain wary amid rising extremism, which often accompanies nepotism in previously stable democracies governed by the rule of law. Naturally, it is human to project political beliefs onto market behavior and to conflate what is ethically desirable with what benefits stock’s performance. To gain a clearer perspective, we stepped back and examined the data to investigate whether a connection exists between the state of democracy and the rule of law on the one hand, and stock market performance on the other

• The past years have brought a marked increase in the number of openly autocratic countries, both contributing to and resulting from a surge in armed conflicts and geopolitical uncertainty worldwide.

• Beyond that, former bedrocks of democracy and the rule of law, like several developed European countries and more prominently the USA, display concerning tendencies.

• For equity investors, this trend prompts the question of whether stock markets can sustain their historically strong performance in such an environment.

• Our article reviews the existing literature on the relationships between democracy, corruption, and equity market performance, and empirically analyzes a panel of more than 60 developed and emerging economies.

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