Stock Market & Elections: The Key Factors

October 22, 2020

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By Sven Carlin. Originally published at ValueWalk.

With the elections coming many expect it will have an impact on the stock market. Of course, there will be some decisions that will help or change something short term, but in the long-term there is no difference because there are other things that matter more.

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Historically elections haven’t impacted the stock market and who wins also didn’t change much. But, that doesn’t mean that political decisions don’t impact the stock market, especially in the current environment and this is something very important which we’ll discuss today and also tomorrow.

Stock Market & Elections: The Key Factors

Transcript

Stock market and elections

Good day fellow investors. The elections are coming in the United States and it’s a good moment to discuss the impact the elections, or better to say politics will have and usually have on the stock market.

We’ll go through what’s going on, the short term, the historical impact of elections, the key factors to think about when it comes to politics and the market regulation, law, taxes, of course, populism, that is an emerging theme, and then how that might impact investments, investments over the long term, which is what we do on this channel. So if you like that, please, investing in the long term, please subscribe, and click that notification bell.

Historical perspective

Let’s start. I’ve recently watched the SNL Presidential Debate had a great laugh. And then YouTube started promoting, again, stock market, which is my search topic on YouTube, and elections so that I can watch and then I really wanted to give a different perspective, because these guys gave the historical perspective, which is, of course, no impact. Watch there have been republican and democratic presidents, but the stock market wasn’t really affected by who was president.

So from a historical perspective, there is no impact. But there is something that’s more important, in my view, will is event in very interesting times, and current times are always different than last time. So looking at history, and expecting it will replicate is not the way you should think about things, you should use common sense, analyse the situation, and then make your own decisions. And that’s exactly what we’re going to do here. And Charlie Munger’s advice whenever you are dealing with someone, and in this case, we are dealing with politicians is to put yourself into their mind and understand their incentive.

So what’s the incentive of politicians? Let me make put my politician mask on. Good day people of YouTube. So you must get out and subscribe, subscribe, subscribe, and that will make your life great. Everything will be great again, but you have to subscribe, subscribe, subscribe, get out there, vote, vote for this channel, vote for me, I’m going to do your taxes, I’m going to mow the lawn, I’m going to wash your toilet, you will don’t have to do anything, we will do everything, we will make your life great again, not as bad as it was before this guy or that guy, who ruined America, who this and that. Vote for us, vote for us, vote for us. I needed to do that to come back from that. And the incentive is very clear. The incentive is winning the elections.

Is their incentive to make your life better? I don’t know. Because if it was then they wouldn’t be very happy when they win the elections, they would be burdened by the huge responsibility. So when I look at the incentives of all politicians, not just the left or right, they have similar incentives, which is to save their job to serve their connections to see the world is going like they are liking it right now. The differences between left and right are not significant. There is politics. And that’s the main road we are going to discuss. Let me show you how their incentive impacts your life and your investment decisions.

On the topic of politics, Warren Buffett simply says that he has been investing with 15 or what, which will be 16 presidents. And that who is the president left, right? Doesn’t really matter. So here we are new president or old president, it doesn’t really matter from an investing perspective, because their incentive is relatively equal and they will do whatever they need to do to win that election. Again, sometimes it will go right sometimes it will go wrong.

Current situation

But the thing is that we must not give that much credit to politicians, not one not the other because they are just doing what they are incentivized to do, which is okay. Are people going to vote for short term pleasure, long term pressure? Well, there is no answer there. Of course, they weren’t going to vote for how can I improve my life immediately. lower my taxes, for example.

That has short term benefit, long term cost, short term cost long term benefit. Long term, we are not trained to think in the long term, at least not the majority of population. And that’s why you have the politics as it is the politicians are what they are, because we vote for them. We select them. And we as a majority, want the short term benefit, who cares about the long term gain, salary.

Taxes

However, whatever we think about in this world, to nothing can be said to be certain, except that and taxes. So of course, taxes are going to have an impact on us taxes have been lower and lower, we see the deficits we have seen the deficit. And then of course, also, something that Buffett explains greatly in his 2018 letter to shareholders is that the like it or not the government, whichever country you live in, owns an interest in any business in the form of taxes.

Buffett calls this the age shares so that we see large dividends that were 35% of net income that are have been lowered to 21%. So the government lowered the ownership in order to increase to lower the taxes and increase the potential for the businesses to compete in this world, and perhaps also push stocks higher, because higher stocks mean more spending mean a better economy, at least for the short term. But this also has consequences.

Short-term, yes, profits increased for the companies at the same valuation. Also the stock market increased and the stock market went up 70% over the last five years, which is a remarkable feat one of the best feats in history. And we will discuss the situation in the stock market tomorrow, where I’ll show what are the risks and rewards and potential long term outcomes?

So tune in tomorrow, again, same time for that discussion. not going to dwell too much here, because here is the topic is politics. So taxes have been Lower, lower and lower, but the deficits have been higher, higher and higher. That’s sustainable, unsustainable, how long will the party last? We don’t know. But we can look at the forces that are impacting on those tax decision deficits decision. And then we can see, okay, when the risk prevails, and might, we might want to change our strategy.

Antitrust

I’ve recently found this. So the Subcommittee on antitrust, commercial and administrative law law of the Committee on the Judiciary, they made an analysis on the four biggest companies. And this is just Google, their discussion launched in 1998. Already in 2000, had become the world’s largest search engine, on AdWords, the top product, and the company is now also the largest provider of digital advertising, leading web browser dominant mobile, mobile operating system, digital net mapping email, cloud computing, voice assistant services, and dozens of other offerings where Google has no competition. And here they say how they purchased well over 260 companies.

Very interesting read also on Amazon here, how they purchase companies or just take their technology make it better and make it possible for others to compete profit margins for Google are greater than 20%. For nine out of the last 10 years, probably the one year was a great find that they had to pet pay close to three times larger than the average us fear firm. It’s clear as they exist today, apple, Amazon, Google and Facebook each possess significant market power over large swathes of our economy. And each company has expanded and exploited their power of the marketplace in anti competitive ways. And here are what they say they should be doing. You can pause the video and have a read.

Populism

But the most important thing is okay, let’s look at the incentive, as we said at the beginning. So these are the four biggest companies, the four largest market capitalization, we have to look, how does that impact you as a voter to see what will politicians do? Of course, it’s a monopoly. According to law, somebody has to intervene and change that but I think it won’t happen that fast. It Won’t happen that fast because of this, this is from Brookings, if you look at the composition of household assets, 72% are financial assets. And just 28% is non financial assets. So 78 72% of the wealth is financial, if you attack the biggest companies with the biggest market capitalization, if you increase taxes, then household wealth will be lower, do you want to be poorer?

No. Therefore, no matter what politicians win, or are in charge, they will, it will be unlikely that they will hit you there where it hurts the most, especially if you lose money, if your wealth goes down, your household wealth goes down, you will be less incentivized to spend and the economy will be in an even worse situation. And that’s the incentive.

And that’s why politics don’t really have an impact in the short term, when they lose control, then also doesn’t matter who is there, because it gets really ugly, also, then, but then again, on the decision making, if you look at the value of households, if you look at the bottom 50% of the population, if they change the decision, they might want to attack these people within the change changes the perspective or depending on where on this richness curve you are, if you are here, okay, populism, anti trust mighty to suffer severely.

Stock Market And Elections: Conclusion

If you’re here, it might help you. But that’s again, something that you have to see where do you fit? And how will that impact you on the long term tomorrow we’ll discuss also valuations low interest rates, and which will give you a better perspective on strategies on what to do, depending on what happens, as I said, if we look at the composition of wealth, the financial assets, retirement accounts, stocks, bonds, mutual of accounts, 42% financial institutions, we are 50%, this would be impacted by any increase in taxes, which would lower consumption, destroyed the economy, etc.

So I would say that politics, not because they don’t do anything, but will not have a big impact because Because no matter who wins, they will have the same investment incentive, which is to win the elections again, again, to stay in power to have their connections settled, covered to have daily life as it goes. 50% of the population is poor. So how are they going to find someone who changes that? That beats me.