Don’t Let the Politicians Into Your Portfolio
by Alan Ebright, on Jun 2, 2021
Ahh..politics. One of my favorite and least favorite topics. The circus of politics and the flurry of emotions it brings out in us could be the basis for a large psychological study. Over my two decades of talking with clients, prospective clients, and even strangers on a plane, what has occurred to me is that we tend to view our politicians like our favorite sports teams. If our guy or gal wins the election, good things will be coming, if he/she loses, only bad things will come. Perhaps it is the binary outcome of an election (one party wins, the other loses) that messes with our psyche. But I digress.
It is great to be passionate about one’s views, and all of us have certain ideals in life that are important to us. Therefore, any of our elected officials that embrace those same ideals are naturally the ones we like. The one’s who do not are our foes. Seems like this is just the way it has always been and will probably continue to be.
However, when it comes to investing, you must really set aside the emotional feelings of your politics because it might make you do the exact wrong thing at the exact wrong time. Let me share a little story. Over the last 12 months we were in a global pandemic, the likes of which we had not seen since the Spanish Flu 100 years ago. I fielded more calls from concerned clients about the upcoming election than I did about the pandemic! I have no specific numbers, but if I were to guess the ratio, it was probably 4:1. 4 times as many clients were worried about the election than the pandemic. Simply amazed me! Naturally, I coached them all through it and talked with them about what tends to happen during elections and their aftermath.
Here’s my take on politics from an investment standpoint only. In these thoughts I have no allegiance to any party, just conveying how an investment manager must assess politics.
- While campaigning, politicians will tell you what you want to hear. Afterall, they want as many votes from their constituents (and swing voters, mind you) as they can get. Do not fear the platform rhetoric. They are not even close to becoming laws at this point. Merely a way of gathering votes.
- It’s the composition of the two houses of congress that are very important. In the House of Representatives, we have 219 Democrats, 211 Republicans and 5 vacancies (4 of which were Democrats and 1 Republican).* The narrowest majority since the late 1800s. On the Senate side, it’s a 50/50 split, with Vice President Kamala Harris to break any ties. For reference, when Obama was elected in November 2008, the House was +79 Democrats and the Senate was +18 Democrats!** 2009 ended up being a great year for markets.
- Pay attention to the moderates. Each party has individual politicians with extreme views, moderate views, and everything in between. Just because one party controls the House or Senate, does not mean every single politician must vote along party lines. Currently, one of the most (if not the most) important senators to watch is Joe Manchin from West Virginia. West Virginia has a Republican supermajority in their state legislature, and Manchin has always been known as a conservative Democrat. He’s publicly sided with fiscal conservatives against another round of stimulus and is not in favor of eliminating the filibuster. You cannot merely assume that he will vote along party lines for every piece of legislation.
- Always remember that Rule #1 for any politician is to get elected, and Rule #2 is to stay If you are an elected official in a swing state, and your margin of victory in the prior election was razor thin, you are going to be very careful about what you publicly say or support. There are some moderate Democrats in swing states who are up for re-election in 2022, so their incentive to vote for anything extreme is severely muted.
- They are on the clock. Once a new party is in place, they have a finite amount of time to get their proposed legislation passed. Once we get within 6 months of the mid-term elections, anyone up for re-election will be focused on their campaign and will most likely be very selective with their voting. So, when they’re out campaigning, and they tell you about the five things they want to do to change the world, they must quickly whittle down that list to usually the ONE main piece of legislation they are pretty sure can pass. Why? Because history has shown that the party who loses the White House, tends to pick up seats in either the House or Senate (or both) in the ensuing mid-term. At that point, the balance of power could be shifted, and the chances of passing extreme legislation become significantly lower. In a divided House/Senate, political gridlock ensues, and that potentially means less legislation gets passed. Markets tend to react positively to political gridlock.
- Do not react to campaign promises. Here is a perfect example from the recent past. Obama won re-election in November of 2012. After the election, the House was now +33 Republicans (it was +79 Democrats after the 2008 election), and the Democrat majority in the Senate of +18 (from 2008) had shrunk to +8.*** The Bush tax cuts were set to expire in January 2013, and Obama had set his sights on tax increases as part of his re-election campaign. There was a huge wave of planning that ensued as a result Obama’s posturing. People scrambled to reposition themselves before it was too late, but it was all for not. Neither capital gains nor estate taxes were increased. Could it have been different? Possibly. BUT, there is no point in hastily making changes based off political speculation. I would argue that we are seeing that exact same thing repeat itself now with Biden. We will all have to wait and see what actually passes.
- You’re investing in stocks of companies, not politicians. I think this is a key point, and political rhetoric blinds us as to the task at hand. When you own a stock, you own a piece of an entity. Some of these entities reward ownership by paying you a dividend each quarter. As profits are made for the company, patient shareholders are rewarded by the stock increasing in value over time. Any new laws that politicians might pass could have a short-term impact on certain industries, and in turn, specific companies. The stock prices of those companies could be affected in the short-term. However, companies are not static. They are dynamic. They figure out ways to either adapt to the new laws or work around them. Companies are also more efficient allocators of capital than the government. If new laws become temporary roadblocks, they’ll allocate capital to areas that are open. Do not let your political opinions blind you to investing opportunities.
One of my mentors used to remind me to “never drag your politics into your investment portfolio.” I think this is a wise statement.
Of course a politician’s promise isn’t worth the paper it’s written on. -Russell Pearce
*U.S. House of Representatives Press Gallery
**History,Art & Archives; US House of Representatives
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