“For the economy and financial markets, the stakes in the coming presidential election are vastly lower than nearly everyone is making them out to be.”

-Mike Santoli, Barrons

 

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Earlier this month, I was on a cruise in the Baltic Sea with Forbes where I gave a presentation on Behavioral Economics & Neurofinance.

Prior to that event, we were having dinner onboard with a table of HNW investors. One of the women at the table went off, spouting nonstop about politics and the upcoming election. She had missed a 109% rally in equities due to her politics, and was convinced that if her candidate won, all would be right in the world.

Sure it would.

What she really needed to do was see the slides 16, 17, 18 and 19 in that presentation about mixing politics and investing (alas, she chose to miss it). The slides shows how Democrats and Republicans alike who invest based on how they vote miss enormous opportunities. They under-perform so badly you would think they were a Day Trader circa 2001.

This has been a pet peeve of mine for a long time. Indeed, my very first column for the Washington Post was titled Why politics and investing don’t mix. And I have addressed this subject repeatedly on the blog.

All of which is to say I indulged my confirmation bias and enjoyed Mike Santoli’s column this weekend (Less Than Meets the Ear) a great deal. Mike points out in the quote above that neither candidate is likely to make any wholesale changes to any major policy, and that your tax rates are likely to be higher regardless of the election outcome. I agree.

One last point worth making: Too many observers Confuse Cause & Effect when analyzing politics and markets. When the economy is doing well and profits are expanding, stocks tend to do well also. These conditions work to the incumbent’s advantage. When the economy does poorly and earnings suffer, it works to the challenger’s advantage. There are some issues with timing and lags, but that is the general relationship.

The usual tail-wagging-the-dog suspects gets this relationship precisely backwards . . .

 

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Previously:
Confusing Cause & Effect: Elections and Markets (January 9th, 2008)

Presidential Blame & Credit (November 22nd, 2011)

What do the markets have to do with the election? Not much (January 14, 2012)

Complexity, Context, Probability & Bias (March 27th, 2012)

Source:
Less Than Meets the Ear
MICHAEL SANTOLI
Barron’s July 14, 2012   
http://online.barrons.com/article/SB50001424053111903431804577508921053002152.html

Category: Investing, Markets, Politics, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “The Dangers of Investing via Politics”

  1. [...] Mixing politics and investing is a sucker's game that many still play.  (TBP) [...]

  2. AHodge says:

    how can this be? there is a show called “money politics” on every day.

    i wish more would watch, and trade on it
    so competent traders can take their money, when they “invest” in their bullshit story
    sombody’s gotta win, and somehow there is also rough justice here.
    the markets dont act like many are buyin into this advice.
    .im guessing the tiny home gamers get burned and withdraw
    so its mainly a politial vehicle fronting as investment advice

  3. b_thunder says:

    “She had missed a 109% rally in equities due to her politics” – if Romney, as he already promised, does not reappoint Ben Bernanke? What if he appoints some “hard money” guy to Chair the Fed? What if he appoints a hardcore “austrian” or Mankiw-type ideologue? How much of the 109% gain do you think will the market give back?

  4. louiswi says:

    @b_thunder

    History can be a guide. to wit, Carter appointed Paul Volcker. Reagan tossed Volcker for Greenspan.

    Deficits don’t matter–Ronald Reagan reiterated by Dick Cheney late in his era.

    Under Romney, deficits will once again “not matter”.

  5. AHodge says:

    to be clear Kudlow etc are a political vehicle fronting as investment advice,
    and they dont really even care how that works out,
    they capture an audience and put out their political message, to a great drooling glazed eyed demographic

  6. 873450 says:

    One thing I am certain about is the job creating 1% will remain uncertain for another four years if Obama gets re-elected.

    I am considering a bid for a comic book expected to sell at auction for between $1 million – $1.25 million. The possibility Obama will get re-elected and raise everyone’s taxes makes me uncertain about proceeding with the investment. On the other hand, if polls give Romney a cammanding lead I will not hesitate to bid aggressively.

    Think hard about how many jobs I will not create and how much of money will not trickle down if I don’t buy that comic book, then cast your vote accordingly.

  7. streeteye says:

    CNBC exacerbates it – they’d rather browbeat Krugman and fawn over CEOs to make the reptilian brains of their audience feel good, than ask good tough questions of both, and have the audience suffer cognitive dissonance and learn something.

  8. Livermore Shimervore says:

    it never ceases to amaze me how fairly intelligent people, and often very intelligent people fall hook line and sinker for the crack cocaine of partisanship. It makes the financial collapse easier to understand, “smart” people have absolutely no idea when they are being totally retarded.

    In large part I blame the for-profit media. We have become nearly Pavlovian in consuming economic reporting fed to us by “news” networks which immediately shifts into “how this impacts the President”.
    It’s almost like turning on the news to hear the sports report and being told that Yankees winning will impact the traffic report. Enter the hyper partisan-baiting news channels like Fox and MSNBC who pump that partisan cocaine to the sheep so they can gorge on some inflamatory emotion. They have no idea they are being manipulated via an unrelenting stream of half-truths that leave out the part that is inconvenient for their party…which is really no truth at all since its a deliberate manipulation. Next to American Idol type singing shows it is the surest winner for the network: baiting the clueless partisan.

    The reality is that politics has very little to do with the economy. 25% of GDP comes from federal spending. The difference in what Republicans are willing to cut (if anything given they’re math never works and always leads to more spending) and what the Democrats are willing to cut is so marginal that any person with a functioning brain can see that rhetoric is disproportionate to the extent of possible spending cuts. The public is totally ignorant of how little difference there is between these parties. Consider for example that few know that spending bills originate in the House. Of the roughly 11 trillion added to the national debt since the time of Clinton, a Republican-controlled House is responsible for nearly 70% of that astronmical spending with its last two years being amongst its highest. The entire notion that one party is more fiscally responsible than the other is comedy, just as that one party knows more about what’s good for the economy. It’s all based on the mother of all false presumptions, that a political party can steer an economy or are responsible for one. The biggest lie that has ever been told was “it’s the economy stupid” and second only to “are you better off than you were four years ago”. It’s neither the job of politicians to give you a better economy nor do they remotely have the capability to do such things. And what is worst of all is that this sucker to partisanship believes that all or nothing politics is consistent with the framework that our founding fathers devised for staggered elections making it nearly impossible to hold onto power for too long. In order for their to be any progress it needs be from consensus and not Ghengis Khan conquests. Otherwise the opposition just comes in and reverses everything that was just passed so that not even incremental change can stick in the long run. Voters need to get wise, but even the most intelligent are more emotional than they are smart.

  9. faulkner says:

    Is applying politics to investing a form of magical thinking? There are true and false doctrines and prophets. Contrary evidence, rather than leading to revised ideas, increases emotional commitment to set the world right – according to their beliefs.

    Could it be they are simply applying an area of life in which they are certain to an area in which they are not? The alternative is they don’t know something they really need and should know. And not knowing what they should know … well, that’s unthinkable or at least painful – which is kind of the same thing.

  10. algernon says:

    Sadly, the thrust of the article is absolutely true. However, with a big Republican sweep, there is the POSSIBILITY of repeal of Obamacare, serious spending cuts, more light-handed regulation, & more judges appointed with some regard for markets, which would have long-run benefits to the economy. Possibility alas, not probability.

    And of course they would continue to waste tons of $ on wars on ‘terror’, drugs, etc.

  11. [...] Politics and investing don’t mix.  (Big Picture) [...]

  12. ellwood2011 says:

    We would all be better off if a consensus emerged that Presidents can do very little to affect the economy in most cases; they should stop trying to or pretending to, and we should let them stop and they should get little credit or blame.

  13. MorticiaA says:

    Funny timing, Barry. I received my Save the Date email for ISI’s Sept. 10th Election Conference within 5 minutes of reading this particular blog.

  14. Livermore Shimervore says:

    @Algernon

    “However, with a big Republican sweep, there is the POSSIBILITY…of serious spending cuts”

    Quiet the opposite.

    The Senate is expected to swing Republican. With a Republican President and Congress there is ZERO chance of anything but higher spending than under Obama still. At least with divided govt every nickel spent is fought over tooth and nail. Given Romney’s plans to cut taxes, increase defense spending to 4% of GDP without any substantive cuts to Medicare and the Ryan Plan’s perpetual avoidance of identifying which of the $1 trillion in tax expenditures (popular tax cuts) it would eliminate, it’s is abundantly obvious that revenues will go lower while spending will go higher still than their current trajectory.
    And to underline the point there isn’t a shred of evidence for the last 50 years to indicate that one party control from divided govt has ever resulted in less spending. To claim to be concerned about spending while voting for one party control of govt is an act of irrationality for partisan pleasure.

  15. nickthap says:

    Does anyone really believe that Republicans are as a party fiscally responsible? These kinds of issues are just cover for the deep-seated tribal affiliations politics seems to require in a vacuum. The vacuum being our current regulatory environment (fiscal, political, etc.).

  16. cognos says:

    Good article. Politics and even tax rates do not interrupt the far more human cycle of “boom and bust”.

    It will continue.

    Obama looks likely to win. And then the Clinton AND Obama era will end in super booms. Hmm.

    All just chance though…