Politics and the Markets: How to Invest in Politically Challenging Times

By Scott Kubie

When presenting to individual investors, what I worry about the most is offending an audience member’s political views, especially when there’s a Q&A to follow. As our political discussions grow more contentious, it’s more challenging to avoid stepping on toes. Investments based on ESG (Environmental, Social, and Governance) screens and similar approaches have increased the connection between politics and portfolios.

But leaving politics out of the presentation has become harder as Federal Reserve, tax cuts and trade frequently move markets. Investors often struggle to put politics in its rightful position relative to their portfolios. How does politics affect investing? It is a difficult balance.

To help move towards a balanced approach, I often think of investors in three broad categories:

• The Politically Engaged
• The Politically Detached
• The Politically Exasperated

Each category has its own challenges with figuring how to invest in politically challenging times.

The Politically Engaged

For presenters, this is the most dangerous group. A number of years ago, before a presentation in Portland I sat at the table with a woman who had graduated from my alma mater, Trinity University. Finding a fellow alum from a relatively small school 2,000 miles from its home in San Antonio was rare and we had a great conversation.

So I was surprised during my presentation when she criticized me for comments on how fracking was going to change the U.S. energy dynamic. She wasn’t open to the analysis because her political views leaned against it.

The politically engaged need to remember the market is affected by a host of factors and doesn’t need to move in the same direction as their political preferences. Measuring from the day after the election, the first two years of the Obama administration shocked many conservatives as the S&P 500 rose over 10% per year.*

Then a very different president produced similarly positive results. The S&P 500 rose over 16% in the first two years of the Donald Trump presidency.*  If they let politics be the motivation, investors who sold out, missed out.

Avoid equating the likely stock market direction with the success of your preferred political candidates. Highly controversial political questions may not be important to other investors. Whatever your view about the long-term societal benefits of fracking, government-funded healthcare or social media these changes can be extensive and create winners and losers in the investment markets.

The Politically Detached

The opposite approach is to pretend politics don’t matter and everything comes down to business fundamentals. The politically detached forget those fundamentals are heavily affected by political decisions. The corporate tax cuts pushed by the Trump administration provided a huge surge in earnings to U.S. corporations and altered their incentives to invest, where to hold cash and long-term profitability. The trade negotiations with China are regularly moving markets and cutting expectations for economic growth.

In the case of trade, corporations are finding it difficult to do long-term planning when the trading rules remain uncertain. Like a driver at a stop sign uncertain whether to turn left or right, corporations slow down until they can better estimate the likely path. Delaying decisions delays investment and the economic boost it produces.

The politically detached need to monitor the political arena and look for the issues most likely to affect economic growth and business profits without turning to cable news every hour to keep up with “breaking news.”

The Politically Exasperated

Some investors manage their political biases well, but become exasperated or overwhelmed by the constant back forth. Part of their challenge comes from the opportunities media provide to watch the political process up close. Cable news, internet opinion, and Twitter all provide a constant flow of information and opinion unavailable to past generations.

The politically exasperated also lose sight that politics is a messy process that follows its own rules. I’ve been listening to the audio version of Doris Kearns Goodwin’s excellent Leadership in Turbulent Times. The book focuses on how four presidents each overcame a significant challenge. Every example included a messy and politicized process involving political posturing and backroom deals.

The exasperated will benefit from remembering political processes are messy and they take place in the open. The debate will go on as long as one side believes it is in their interests to continue the discussion and often it takes an approaching deadline before the compromising starts.

The Politically Astute

We need to find a balance between these common approaches to politics used by investors. Avoid equating how the market will move with your personal political views. Don’t ignore politics and don’t become exasperated by the process.

The political process moves at its own speed and understanding how politics affects investing can help us maintain a balanced outlook and avoid the pitfalls associated with each approach.

The markets are affected by politics, but also a host of other complicating factors. Your advisors are here to help you make some sense of it all, and to help you plan for you and your family’s future. Get in touch with us today, and let’s make a plan.

Let’s Talk!

*Source: Morningstar Direct