Barron’s cover story this weekend asked, “Trump and Sanders: Are They Killing the Stock Market?” Noting the correlation between the rise of so-called outsiders and movement in the equities markets, the business weekly said, “U.S. stocks have fallen sharply since Trump and Sanders began rising in popularity in the polls. It could be more than coincidence.”
It could be, but I doubt it.
The story hits upon some of my favorite investment errors: It creates a false narrative; mixes ideological (read emotional) activity with investments; confuses correlation with causation; and misunderstands the markets as a cause of election outcomes, rather than recognizing that similar underlying forces drive both.
We have seen this movie before, and it doesn't end well for those who tie a political narrative to an investing thesis. Then there's the separate issue of giving presidents way too much credit for good economies and strong markets and assigning way too much blame for the bad.
I have been preaching the importance of separating your personal voting preferences from your investments for longer than I care to remember. There is a pair of slides I have been using to make the point since at least 2010. Whether it's individuals or institutions, people recognize the foibles of others -- or their own -- in this discussion.
Here are criticisms for investors from either side of the political aisle.
Recall that back in 2003, President George W. Bush had passed the Jobs and Growth Tax Relief Reconciliation Act of 2003. My hedge fund buddies on the left read me chapter and verse as to how horrible the impact of this was going to be: It would blow out the deficit, it wouldn't create jobs, it was a wealth transfer from the poor to the rich, it would be the first time taxes were cut during a war.
But their jobs were not to sit in a think tank, stroke their chins and think deep thoughts; rather, it was on them to deploy their clients' money to take advantage of the environment they found themselves in. This was especially true for the guys (and they are all guys) running absolute return funds.
People running money certainly should have considered the impact of huge tax cuts on markets and put aside their own politics. As one wag noted at the time, "Give me a trillion dollars, and I'll throw you one hell of a party." Markets took off in anticipation of a lot of stimulus flowing through the economy. That trillion-dollar bump sent the market up more than 96 percent over the next four years. And although some of the political warnings about the tax cuts may have eventually come true, they were completely and utterly irrelevant to U.S. investment returns.
Right about now, my Republicans friends are snickering. They shouldn’t be.