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Not Everything In Politics Affects The Stock Market

By Ben Strubel. Originally published at ValueWalk.

politics market Large Cap Tech faang stock Informational Fundamental Market Efficiency

Ben Strubel’s letter to investors for the month of September 2020, discussing that not everything in politics affects the stock market.

Q2 2020 hedge fund letters, conferences and more

Dear Investors,

Three Factors Driving The Market Recovery

The stock market has generally recovered its COVID-related losses. The market recovery has been driven by three factors.

First, as I mentioned in previous letters, large companies as whole have fared much better than smaller companies. Much of the COVID-related economic damage was concentrated in the travel, dining, and leisure sectors, which are characterized by many small businesses. The real economy got hit much harder than the companies that make up the stock market.

Second, there have been just enough stimulus measures to prevent an economic crash. The multiple stimulus packages definitely weren’t perfect, but they did do enough to help cushion the blow and allow the economy to begin to recover.

Third, most of the shutdowns are over, and many states have been opening up most sectors of their economies. Although the lack of a nationwide testing and tracing regime has led to a spike in COVID cases in many areas, the stock market does not care. Yes, the increase in cases is bad from a public health perspective. Yes, depending on your personal view of the relative risks of shutdowns versus the chance of getting COVID, an increase in cases may provoke deep personal fear. It is true that the stock market doesn’t care if some people get COVID. As long as the economy continues to show signs of recovery, the market is happy.

As long as things states continue to open up industry sectors and COVID cases are not at emergency levels, the market likely will not drop.

Politics Affects The Stock Market But Not Everytime

The number one subject that friends, family, and clients have asked me about is the election. Over the decades, politics in the US have become increasingly divisive and more tribal. People today view politics from an us-versus-them framework. The direction and fate of humanity and the country is no longer seen as the journey of many fellow humans toward the common goal of a good life.

When it comes to investing, it’s importantly to remember that while the political environment can certainly affect the investment environment, not every political issue has investment ramifications. Also, some political issues that do affect effect investments are not big enough to matter. You may feel very strongly about an issue. It might even be an issue that would have a huge personal impact on you. That issue would, of course, be very important for you. But, it may not matter much for your stock market portfolio. It may not matter at all to the market.

Here’s an example. Let’s say you care very deeply about environmental issues and live next to a nature preserve filled with native plants and wildlife. Let’s say a Fortune 500 chemical company wants to build a new plant on that land. You support the Purple political party that is viewed as the more environmentally friendly one and pledges to block the new plant.  The competing Cyan party pledges to allow the plant to be built. You are deathly afraid of the Cyan party winning and rightfully so. You disagree with the values of the party, and you also are likely to be hurt economically if the party wins because your beautiful backyard will be next to an industrial site and your property value will decrease.

Even though we have a scenario that involves a huge company, that company may not matter to the overall market. The company might build the plant somewhere no matter what. Maybe the market thinks the Cyan party will win and stocks are high. If the Purple party wins and it looks like the plant might not be built, then the chemical company stock may drop.

Let’s say the company operates 10 chemical plants and is so big it’s one of the 20 largest companies in the market (this means the company would make up roughly 1% of the stock market). The new plant would be about 10% of the company’s size (100% divided by 10 chemical plants). The chemical company stock drops 10% and the effect on the market is 10% of 1% (the weighting of the company) or .1%. The stock market would lose one tenth of one percent. Yes politics affected the market but not in a big way.

Imagine, on the other hand, you are Cyan supporter. Maybe unemployment in the town is high. Maybe the new plant will add hundreds of well-paying jobs, and the new tax revenue the town will bring in will help renovate the local school. What if your brother is an out-of-work plant operator and you have two school-age kids in the town. You would be a passionate Cyan party supporter for good reason!

Politics Isn’t Just The Presidential Race

It’s also important to realize that politics isn’t just the presidential race. Counting state and federal government there are almost 8,000 elected legislators! Policy that affects the economy is being made by an enormous group of people all over the country (although the Federal government is of course the most consequential).

Sometimes political parties are not “good” for the market or “bad” for the market. They are just different. A party might be good for one sector of the market while simultaneously bad for another. For instance, the Obama Administration passed a landmark health care act that greatly benefited health insurance companies. The Administration also began a crackdown on for-profit education companies. You could have simply bought lots of health insurance stocks and sold for-profit education stocks.

Under Trump? The Affordable Care Act (ACA) has been attacked. Let’s say the ACA repeal vote didn’t fall short. You could have easily sold your health care stocks and bought for-profit education stocks. Or you could have dispensed with all the buying and selling and just held defense contractor stocks, which did well under both presidents.

The point is that not everything in politics affects the stock market. Even when politics do affect the market, the changes may be as simple as changing which sectors hold opportunities to make new investments or to sell at a profit.

The post Not Everything In Politics Affects The Stock Market appeared first on ValueWalk.

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