Between June last year and the beginning of February, Brazil’s Ibovcespa index rose by over 40%, making it one of the best performing equity indices in the world.
Enthusiasm for Bolsonaro emanating from the belief that he would undertake drastic reforms to cut Brazil’s welfare state, and in particular its pension system, drove much of the rally.
However, the index has fallen 2% since the beginning of the month with Bolsonaro's party engulfed in scandal.
On Monday, it fell by roughly 1% as Bolsonaro fired Gustavo Bebianno, secretary general of the presidency and a close personal ally, over a campaign finance scandal.
Commentators suggested that his removal might make it more difficult for Bolsonaro to pass the divisive pension reforms which investors believe to be vital to sure up the country’s finances.
With so much enthusiasm priced into Brazilian equities any disappointment could lead to them falling in the same manner in which they ascended.
Investors also seem to have ignored other aspects of Bolsonaro’s aims. He is a Donald Trump-like populist who has pledged to move against his political opponents and to take drastic action to crack down on crime in the country — primarily through tougher police measures, military force, and the mass armament of the country’s citizens.
This sort of rhetoric has ignited fears that Brazil could return to the dark days of the military junta of which Bolsonaro has spoken of so fondly in the past.
Market enthusiasm for right-wing populists has been a theme of late.
When Donald Trump was first elected president of the US in 2016, markets experienced what was called a "Trump Bump", with equity investors keen to position for higher infrastructure spending and tax cuts, and ignoring Trump’s talk of protectionism against China, despite the negative earnings consequences of that for a number of S&P 500 companies.
The Trump Bump lasted a year but then the president whipped up a trade war with China that rumbles on today.
Equity markets have suffered as a result, with tough trade talk often blamed for the global sell-off that battered markets late last year.
While tighter monetary policy also played a part, stability, and occasional stasis, during the Barack Obama years allowed the market to function normally. Between 2009 and November 2016, the month of Trump’s election, the S&P 500 enjoyed nearly 200% growth.
For many investors with a view on economic fundamentals, stability is preferable to the Trump tumult.
Despite the short-term enthusiasm that populist leaders can whip up, equity markets often perform best during periods of political calm.
Should Bolsonaro bring Trumpian chaos to markets, those who cheered at the outset stand to get burned.