Nicklaus: Elections are important, but they’re a poor basis for investment decisions
(St, Louis Today)
September 20,2020 (David Nicklaus)
In this political season, investment experts are offering plenty of advice and conjecture about the presidential election.
They say the stock market is likely to be volatile as candidates rise and fall in the polls over the next six weeks. They advise that a win by Joe Biden might be good for alternative energy stocks and the construction sector, while Donald Trump’s reelection could benefit banks and oil companies.
Here’s what you should do with all that advice: Ignore it.
Yes, the economy will be affected by the next president’s policies, but it also will be pushed and pulled by myriad other forces, including technology, world events, natural disasters and, most importantly right now, the coronavirus pandemic.
What Biden does with tax rates or Trump does with tariffs will matter at the margin, but businesses adapt rapidly to policy changes. If you’re fearful of the damage that a tax-and-spend Democratic administration can do, consider this: Since World War II, gross national product has grown 1.6 times as fast under Democratic presidents as under Republicans.
Stock market returns, too, favor the Democrats. If you’re inclined to make a sector bet based on politics, consider some recent history. Trump’s 2016 victory was thought to be good for fossil fuel companies, but Exxon Mobil shares have fallen 60% since he was elected. Coal producer Peabody Energy is down 85% since it emerged from bankruptcy in 2017.
“Politics is a variable, but it’s not a priority variable,” says Ward Brown, a research analyst at Argent Capital Management. “There’s not enough impact on future earnings from who’s in office.”
“Consider this, too: If you see a poll saying, for example, that Biden is likely to win in November, that information’s available to all other investors. It’s already priced into the stock of, say, an electric-vehicle company that might benefit from Biden’s energy policies.
“Current market values reflect what investors expect to happen in the future,” says Wes Crill, senior researcher at Dimensional Fund Advisors. “Whatever your expectations are about the future for any important event, it’s unlikely to benefit you as an investor.”
Interestingly, Argent is an active money manager while Dimensional runs passive funds. Both agree that political predictions are a poor way to make investment decisions.
Nevertheless, researchers have found that investors become more bullish, and follow sound strategies, when their political party is in power. They lose confidence and make worse decision when the opposite party is in control.
Don McArthur, senior investment strategist at Commerce Trust Co., watches the polls for clues about which way economic policy might tilt next year, but he hasn’t used them to make portfolio decisions.
For one thing, it’s not yet clear which party will control the Senate, which will affect the president’s ability to enact his agenda. For another, McArthur figures the market will be driven by forces much stronger than politics.
“We have to remember we’re in a global pandemic,” he said. “The path of the virus, as well as progress on health care and vaccines, is more impactful to the outlook for equity markets than the presidential election.”
In the next six weeks, every self-respecting investment guru will feel a duty to opine on how the election’s outcome will affect the market. When that sort of commentary pops up on your TV screen, do your portfolio a favor and change the channel.