Politics-Based Investing: Just Say No

2024 is already shaping up for record investment losses from betting on election outcomes.

Thinking of making an investment based on this year’s US election? The massive stock market swings of the past couple weeks are proof positive that you’re not alone.

And the flood of advertising for politics-based investment strategies has yet to crest. Last week, I received an email claiming “every market from stocks to crypto is poised for significant shifts,” promising a wealth of trades to take advantage.

Here’s some advice that will save you a lot of pain later this year: If you want to bet on politics, don’t shake up your brokerage account. Instead, visit one of the myriad Internet gambling sites and place a bet there on your favorite candidate/political party.

Elections have consequences. And changes can have a major impact on certain investments. For example, state election results are a critical piece of my analysis in Conrad’s Utility Investor. And they will be again this coming November.

But making investment decisions based on election predictions is a fool’s game for three main reasons:

·      Politics brings out emotions that can make smart and timely investment decisions impossible.

Most days, I’ll post an investment-related message or two to my X followers at @Roger_Conrad. I’ll also occasionally offer an opinion on energy issues. And there are a number of voices on the forum who often share insights I haven’t fully considered.

Unfortunately, many posts are just highly emotional advocacy for “either/or” points of view—worse than useless for understanding anything. And opinions are arguably far less objective and insightful when it comes to politics.

Spirited elections are this country’s DNA. But if you’ve already decided who you’re voting for in November, you’re already emotionally invested in the outcome. Any politics-based investment decision you make is going to be clouded. And once you’ve made it, those emotions will only grow stronger, making it harder to act rationally if events unfold differently than you expect.

·      Even the pros don’t predict election results with enough accuracy to intelligently craft investment strategy.

The most recent example is this month’s French parliamentary elections. Just days before the vote, pollsters universally forecast a coalition of right wing parties would finish first. The only question in the eyes of the pros was whether the Right would win an absolute majority. But all agreed that President Macron was doomed to irrelevance. Instead, the Right finished a distant third and the Left first, with Macron firmly in place.

The pros didn’t overestimate the French Right’s appeal. Rather, they underestimated Left and Center cooperation to prevent a Right wing government. And as a result, parliament now basically reflects the French public with roughly a third of voters on the right, a third in the center and a third on the left.

In the US, there are just two major parties. But if anything election outcomes are even less predictable. That’s because we add regional and structural complexity to the reality that—like basically every other country—we’re about a third on the right, a third in the center and a third on the left.

Maybe political polls this far out will accurately predict what happens November 5. But it would be the first time that’s happened since I “voted” in my elementary school’s “presidential election” in 1968.

Moreover, what this election year lacked in competitive primary contests, it’s more than made up for with novelty since. And there’s still plenty of time for multiple additional twists and turns to rock the investment markets, and flummox political pros’ predictions.

The French election outcome demonstrated once again how much money can be lost when politics-based investment strategies run into unfulfilled forecasts. Prior to the vote, traders sold utilities hard on the premise the Right would engineer a “Frexit,” cutting off nuclear energy exports to the rest of Europe. Now sellers have been whipsawed, with the new government likely to double down on current energy policy.

·      Best laid plans of mice and men often go awry.

Regarding government policy, there’s zero doubt every US president would agree with that 1785 line by the poet Robert Burns, starting with George Washington in 1789.

Our most popular presidents enjoyed a “honeymoon” period following elections. And the more successful used that support to enact aggressive “first 100 days” policy agendas.

It’s always possible one party or the other will secure both the White House and Congress in November and try to seize the day. And Republicans’ 922-page “2025 Mandate for Leadership” is if anything hyper-aggressive, promising extensive social engineering, mass replacement of professional bureaucracy and at the very least a trade war with China.

The treatise also advocates for massive increases in US oil and gas production. But consider this:

The best performing S&P 500 stock sector since the Biden Administration took office is oil and gas, with twice the gain of second place Big Tech. Conversely, during the Trump years, the S&P Energy Index lost more than half its value.

Or take renewable energy: The largely earnings-less S&P Global Clean Energy Index was a huge Trump years winner, gaining over 150 percent and double the return for the S&P 500. Since Biden took office, that Index has lost more than half its value.

Clearly, investment performance had nothing to do with government policies, which have been quite aggressive the past 8 years. But even a focused government not afraid to push boundaries can only affect so much, including for businesses as politicized and therefore regulated as energy.

When Trump entered office in 2017, peddlers of politics based investing pounded the table to buy oil and gas stocks. They preached sector Armageddon in 2021 when Biden came to power, while advising the opposite for renewable energy stocks.

Each time, they got it exactly wrong—not because they misinterpreted what the Biden and Trump Administrations would actually do. Rather, they grossly over-estimated the impact of government action and so doing underestimated more important factors.

Remember this: The catalysts for investment success are much the same in presidential election years as they are the other three of every cycle. Stay cool this summer and keep politics far away from the business of running your portfolio.