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On Elephants and Donkeys

During my 20 years of professional investing experience, I have learned that political considerations rarely matter as much as the papers say. Stocks tend to rise and fall no matter which party is in the White house or who controls congress. For the most part, I believe that businesses have the attitude, “tell me the rules and I’ll figure out how to make money”. Said another way, I have always been a business purist, believing that taxes and regulations matter but that business strategy and innovation matter more. However, it is getting harder to dismiss the role of government in the economy.

I have had more than one conversation this year with investors who plan to get out of the market before the election. While the economy appears to be doing just fine, there is an impending sense of anxiety about what could happen this fall. Gridlock can be an investors best friend, since it freezes the status quo, allowing businesses to flourish, but dysfunction can erode confidence in the system, and that could spook investors.

Which makes me ponder ‘when’ political issues truly matter. As I look back in history, there are few examples where political considerations made a lasting impact. In fact, political crises more often appear to be buying opportunities. Consider the periodic congressional debt ceiling shutdowns that promised economic chaos. They historically resulted in temporary market declines that quickly recovered. Consider the BLM riots of 2020 or the January 6 riots of 2021. In both cases the market did not appear to notice the unrest. Internationally, there was the infamous ‘Brexit’ vote in the UK, where the UK voted to exit the European Union, and which pundits promised would result in economic chaos. On the day the Brexit vote was announced, the London blue-chip index fell 7% in early trading but ended the day only 3.15% lower and within a week had recovered all its losses.

This history makes me wary of overemphasizing the election. Could this election be different? Yes, but as investors I think it is important to consider where the political arguments are simply noise, quibbling over tax rates of 25% versus 28%, or spending of $1.7 Trillion versus $1.68 Trillion, and where the political arguments spill over into real-world problems such as war, crime, and instability that could cause individuals and businesses to pull in their investments.

I admit that the role of government is becoming harder to ignore. Since the Covid lockdowns we are entering new levels of debt fueled government largesse, intense regulation of virtually every industry, and growing political divide that appears to go beyond the typical Washington gridlock. Despite the positives on the market and the economy some caution is warranted.


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