Red or Blue: Politics, Stocks and You

Fisher Investments |

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Our political commentary is intended solely to assess potential market impact. We favor no party and believe partisan ideology is dangerous in investing.

With UK elections approaching and the 2016 US presidential campaigning kicking off, headlines on both sides of the Atlantic are rife with speculation over which parties and candidates are “good” for stocks. Don’t let any of it sucker you: Stocks have zero party preference. They care about policies and unintended consequences, not ideology and opinion. When weighing how an election could impact stocks, turning off your personal political biases is paramount.

My boss, Ken Fisher, discusses this at length in Chapter Six of our new book, Beat the Crowd. Opinionated investors from both sides (Democrats and Republicans in the US, Labour and the Conservative Party in the UK) tend to believe their party is best for stocks, and all can cherry-pick data to “prove” their case. But a long look at market history shows stocks have no preference. The US has endured 13 full bear markets since reliable market data begin in 1926. Seven started under Democrats; six began under Republicans. That’s as equal as you can get when you’re working with an odd number.

In both countries, each major party has presided over bull and bear markets alike. Exhibit 1 shows the S&P 500 since 1926 began, with Democratic and Republican administrations shaded. Exhibit 2 shows the FTSE All-Share since 1962 (earliest available), with Labour and Conservative governments highlighted. Neither is visibly superior for stocks. The stark differences between the Thatcher/Major years (1979 – 1996) and the Blair/Brown years (1997 – 2010) might give one the impression that stocks prefer the Conservative Party, but don’t be fooled—the strong correlation between US and UK stocks shows global trends played a large role over that stretch. The global 1980s bull didn’t result solely from UK politics. Nor did Labour policies cause either global bear market during the last decade.

Exhibit 1: US Stocks and Party Control

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Source: FactSet and Global Financial Data, as of 4/9/2015. S&P 500 Total Return Index, 12/31/1925 – 12/31/2014.

Exhibit 2: UK Stocks and Party Control

UK_Stocks_and_Party_Control.jpg

Source: FactSet, as of 4/9/2015. FTSE All-Share Price Index, 4/30/1962 – 3/31/2015. Price returns used instead of total due to data availability.

Stocks are efficient—they quickly discount all widely known information, including opinions. It is next to impossible for any investor to believe something, good or bad, about a politician or party that isn’t already reflected in stock prices. Opinions are everywhere—TV, radio, newspapers, Internet, dinner tables, golf courses, spas, coffee houses, pubs—and as soon as they’re out there, folks have acted on them. Opinions often conflict, too. To stocks, it’s all just noise.

The Financial Blind Spot of Ideology

Bias is deadly because it blinds you to the reality that the market is not affected by politics. If left unchecked, it can drive you to trade on opinions, not facts, and ignore opportunities as well as risks. In the US, for example, we’ve found the majority of investors tend to lean Republican, believing pro-market campaign pledges will translate to market-friendly policies and happy stocks—while fearing the opposite under Democrats. But in reality, both parties are full of politicians who renege on campaign pledges, moderating so that they don’t alienate half the country when it’s time to run for re-election.

Republicans, in reality, aren’t uniquely business-friendly. Nor are Democrats inherently bad for business. Both parties have implemented laws good and bad for markets. Despite the Republicans’ pro-business reputation, a Republican administration gave us the horrific Sarbanes-Oxley Act, which sunk stocks in mid-2002 and is a drag on business to this day. A Republican administration also gave us price controls and rationing in the 1970s. (Republican governments have done fine things, too, like cutting red tape in the 1980s.) Conversely, while Democrats sometimes get a bum rap from investors, a Democratic administration gave us NAFTA and banking freedoms in the 1990s and big tax cuts in the early 1960s. (Democratic governments have had missteps, too, like creating the Fed’s economically misguided dual mandate in 1978.)

The same is true in Britain. The Conservatives and Labour are equally responsible for policies stocks have liked (free trade and financial deregulation) and disliked (price controls) over time.

Policies, not party or people, That’s what stocks care about—and that’s why gridlock is such a powerful positive. Stocks tend to hate new laws that redraw property rights, change the distribution of resources and capital, create regulatory barriers or otherwise interfere with normal commerce. When radical laws stand a big chance of passing, legislative risk can hurt stocks. In that environment, businesses tend to enter wait-and-see mode rather than deploy new projects, which stymies overall economic activity. Strong majorities from any party can increase stocks’ legislative risk. Gridlock helps prevent big new laws, bringing relief to stocks. Markets love it when governments are quiet.

The US and UK have quiet governments, and they should stay quiet for the foreseeable future. With Congress under Republican control and Democrats in the White House through 2016, gridlock is assured at least until January 2017. Across the pond, no party looks likely to win a majority on May 7, extending the gridlock UK stocks have enjoyed since May 2010. Considering that folks fear big change from both major parties (EU exit from the Conservatives, price controls and bank break-ups from Labour), gridlock should bring welcome relief. 

 

By Elisabeth Dellinger, Fisher Investments

Beat the Crowd, by Ken Fisher and Elisabeth Dellinger, is available for purchase now at Amazon and BN.com.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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