Your Political Opinions are Emotional
Political opinions are powerful forces. Usually, they are more influenced by emotions and passion than they are by facts. The enemy of good investing is human emotion. Human emotion fueled the internet bubble. Human emotion drove people to buy homes they couldn’t afford (it’s the American dream!). Human emotion took the Nasdaq to 5,000 in 2000 and took the stock market to a 15 year low in the spring on 2009. Most investors underperform because of their emotions. They pile into stocks when they are overvalued and exit when they are at their most appealing level. Winning at investing isn’t about smarts, it’s about mastery of your emotions. If the market were made up of people like Spock, then Mr. Market wouldn’t be able to act so crazy. Fortunately the market is made up of people who are the opposite.
Making the Wrong Call
The emotional impact of politics is one of the key reasons it should be excluded from investment decisions. Case in point: I am sympathetic to a small government perspective. After the election of Barack Obama and a completely Democratic congress in 2008 during a financial crisis while the Federal Reserve was increasing the money supply like Weimar Germany, it was tempting for people of my orientation to think that the country was about to turn into a hyperinflationary socialist state. At this time it was more tempting than ever to shout “sell” from the rooftops.
Selling in late 2008 would have been a terrible mistake. It is a mistake made by many right wingers who loaded up on gold as they prepared for financial Armageddon. Since 2009, the S&P 500 is up 155%. Gold is only up about 15%. In 2009, the immediate year after the collapse, the S&P rose 28%.
Let’s examine another scenario. Let’s say you were someone of a more liberal orientation when Ronald Reagan was elected is in 1980. Many of the leading (liberal) economists of the time predicted that Reagan’s policies would be a complete failure. They predicted that his fiscal policies would stoke instead of quell inflation. The Reagan years saw a 144% increase in the S&P 500.
The bottom line is that while you may try to convince yourself that your politics are hard grounded in facts and are as immutable as the laws of nature, you simply can’t use your political beliefs as a useful metric to predict future market returns. Your politics are grounded in emotion and for that reason they shouldn’t guide your investment thinking.
Does it Even Matter Who the President Is?
Nor do I think politics even matter that much to the economy. The popular news creates the impression that politics is the only thing that influences the economy, but the truth is that it doesn’t really matter all that much. American businesses are going to try to sell more products and be more productive no matter who is President.
My guess is that if Al Gore won the 2000 election, Alan Greenspan would have still cut interest rates in the wake of the internet bubble, homeowners would have still levered up, and the housing collapse was inevitable. Similarly, was Bill Clinton responsible for the surpluses and prosperity of the late 1990s, or was it simply a surge of computer-driven productivity gains that would have happened anyway? The President and their party receive the credit for booms and the punishment for busts in the public’s mind, but their actual real world influence is limited.
Also, the United States political system is set up to resist radical change. That may be frustrating when the President can’t implement their desired mix of policies, but it is a good thing for the health of the economy. The Constitution is designed to derail radical change and it works most of the time.
The Federal Reserve plays a more important role than the President in the direction of the economy. The Fed’s influence is still limited, though. The Fed can only influence the short-term gyrations of the economy and the inflation rate. They can’t impact the long-run trend of the economy because the long-run trend is driven by productivity. Despite the attempts of policy makers to influence productivity, I doubt that public policy can have any impact at all on productivity rates.
Productivity seems to be driven more by the forces of capitalism and the abilities of managers than it is by policy. I doubt that laws can make a country more productive any more than a law can change the weight on my bathroom scale. Productivity is the true driver of economic performance and it appears to be out of the hands of policy makers. That’s probably a good thing.
Source: United States Department of Labor. Productivity does not seem to care who the President is.
Right now we’re in a productivity slump and everyone is losing their minds over it. I think this productivity slump is much like the slump that occurred in the 1970s: it’s temporary. Much like the boom in productivity from 1995 to 2005 was also temporary. Productivity appears to be stubbornly mean reverting. It has a tendency to revert to its 2% long term trend and there is little we can do to change it.
There was a belief in the late 1990s that information technology had permanently increased the productivity rate. That’s what the “New Economy” talk and hyper optimistic federal government budget projections were driven by. It wasn’t permanent and productivity is reverting to the mean. Similarly, the worry now is that the productivity slump is a sign of permanent stagnation in the US economy. That’s probably just as wrong as the 1990s optimism was. At some point in the next 10 years when productivity starts surging due to mean reversion, we’ll hear that we are in a new economic era of higher productivity driven by artificial intelligence, social media, cloud computing, 3-D printers, etc. Then it will revert to the mean and everyone will start wondering if we are in a permanent slump again.
There is very little that politicians do to change desire of individuals and businesses to earn more money, which is really the driving force behind productivity.
The lesson of history seems to be that the safest long term bet is to leave your politics at home when making investment decisions. There is a human tendency to believe that if there are people you disagree with in power, then the world must be headed to hell in a handbasket. If there are people that you agree with in power, then there is a tendency to believe that manna will begin to come down from the heavens. It’s your emotions talking and emotions are the enemy of capital gains.
Besides, your political beliefs should be deeply held as a result of moral conviction. They shouldn’t be formulated based on the impact that a policy will have on the S&P 500. They’re for the voting booth, not your portfolio.
PLEASE NOTE: The information provided on this site is not financial advice and I am not a financial professional. I am an amateur and the purpose of this site is to simply monitor my successes and failures. Full disclosure: my current holdings.