Investing during an election - just vote present

J.P. Szafranski, BridgeTower Media Newswires

Elections matter. Collectively choosing those who will serve in our executive and legislative branches of government and counting on the peaceful transfer of power is a privilege that we should never take for granted. The values and political philosophy of our elected leaders can drive widely varying types of legislation and executive leadership that can significantly impact our lives both at home and at work. It is incumbent upon each of us to learn about the candidates and make informed decisions at the polls.

This is a column about the markets and investing and not a column about politics. With that said, let’s talk about how elections can impact financial markets. The most important thing to know about how a presidential election will impact the stock market is that we have no good way of knowing. Despite this, we tend to fall victim to confirmation bias by over-emphasizing a fear that if the candidate we oppose wins, it will cause the markets to crash. Candidate: Bad. Markets: Bad.

Recall that on election night in 2016, overnight Dow Jones Industrials futures plunged nearly 900 points as Donald Trump’s surprise Electoral College performance came into view. The knee-jerk reaction came from fear that a Trump presidency could harm markets by kicking off a trade war and destabilizing international relations. Within hours, markets rebounded with newfound optimism about a Republican control in Washington driving lower taxes and regulation. The Dow index more than made up for the plunge by closing nearly 250 points higher the next day.

Plenty of market observers, amateur and pro currently express concern about what a potential Biden administration might do to the stock market with higher corporate taxes and more stringent regulation on the agenda.

It’s complicated. Elections surely matter to markets, but to let the White House occupant drive one’s view on future market performance is just asking for trouble. Oftentimes, we see counterintuitive results.

I vividly remember sitting in an analyst meeting with the CEO of a Fortune 500 energy company in the immediate aftermath of the 2016 presidential election. The bullish afterglow of having a supportive administration in place for the energy sector was palpable. The CEO didn’t hesitate to throw cold water on everyone. As we now know, the first four years of the Trump administration have not been friendly to oil and gas investors.

To paraphrase his view, he told us that this election result did not make him bullish about oil. Clearing the way for rapid production growth was asking for trouble with commodity prices. Further, he reminded us that it would remain very difficult to construct new energy infrastructure given established federal rules combined with state and local regulatory frameworks. Boy, was he right. Just ask the owners of Dakota Access Pipeline, Mountain Valley Pipeline, among others.

Speaking of counterintuitive results, not only did energy stocks thrive during the Obama administration, so did Wall Street. Banks were a frequent, often deserving scapegoat in the years after the financial crisis.
Dodd-Frank legislation imposed stringent new rules making it tougher on banks. Despite this, the S&P 500 Financials index returned a cumulative 165% during the Obama administration years of 2009-2016. Trump followed through on many bank-friendly policies only to see a measly 12% cumulative positive return through this September. To be fair, it’s not always counterintuitive. Stringent new environmental regulations imposed by Obama combined with depressed natural gas prices to absolutely decimate the domestic coal industry.

The point here is: Don’t overreact to any one election outcome with a blanket assumption about what markets will do in response. Most of the time the best course of action for an investor is no action at all.

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J.P. Szafranski is CEO of Meliora Capital in Tulsa (www.melcapital.com).