We sometimes talk like the things happening in the political world are all that affect capital markets, a grave mistake to be sure. But the corollary to that is equally dangerous, and that is the treatment of the political sphere as if it has no impact whatsoever. The reality is that markets are most fundamentally driven by earnings (in the long term), but many political happenstances can affect those long-term earnings. And of course, in the short term, markets can be affected by all sorts of things besides earnings – sentiment and liquidity, to name a couple. Our conviction at The Bahnsen Group is that one’s ideological commitments in the political world are not as important to the investment results we seek to commit as is one’s ideological awareness – engagement – education. To ignore the political realm and its impact on markets as an investment manager, is malpractice as we see it, so we not only seek to understand what is happening in the realm of domestic government and also international geopolitics, but we also seek to understand its impact on markets and the investing landscape at large.
The Federal Reserve is not an entirely apolitical machine, as most are aware. And certainly the Fed’s impact on markets and relevance to matters such as interest rates and money supply is not unknown. There is an economic relevance to the concept of “price discovery” – the term the greatest economist of the 20th century, Friedrich Hayek, gave to the idea of two parties arriving at a mutually beneficial agreement – the juxtaposition of price and value. This process is vital to a healthy and distortion-free marketplace, and we believe much of present monetary policy has threatened it. Analyzing the Fed and their impact on price discovery cannot be done with no political lens whatsoever – there are other machinations at play, always and forever.
Yesterday, an historical deal with Iran was announced from the oval office. The political handicapping we are doing suggests that it will squeak through unless enough Senate Democrats shock us by stepping up to block it. We do not expect they will. Few citizens would deny this agreement contains profound implications for geopolitics, for Middle East relations, and for the peace and stability of Israel and other pro-West factions in the region. There are differing opinions as to what those implications may be. As investment fiduciaries, we do not have the option of ignoring the impact of world-affecting deals like this agreement with Iran. The impact on trade, commodity prices, and so much more, requires a political interpretation of this market-sensitive event.
The leading candidate for the Democratic Presidential nomination, Hillary Clinton, this week announced pieces of her economic agenda. They included extending the period that stockholders would have to hold a stock to receive long-term capital gain treatment. Yes, that was a hallmark of her economic agenda. They included a commitment to crack down on companies like Uber, where service providers are classified as independent contractors. She declared a commitment for loans and investments in “clean energy.” She spoke against activist investors in the hedge fund community, etc., etc. Differing opinions can and will exist around the policy prescriptions she proposes. But in addition to having a worldview around what does and does not make for good policy, we also must analyze various policy prescriptions for their impact on markets and their impact on the investing landscape. The same is true for various Republican candidates for President, though less clarity exists around who that nominee will be, and therefore which policy prescriptions warrant serious analysis. We see top contenders in Sen. Marco Rubio, Gov. Scott Walker, Gov. Jeb Bush, and perhaps a couple others, but probably do not take seriously the impact on markets from the policy platform of some of the lower tier candidates. All this to say, we must monitor these things, form opinions, and position client portfolios accordingly.
The Fed, Iran, and Presidential elections are rather obvious examples of where politics and the markets meet. Many more nuanced and less headline-worthy examples take place every day. Judicial rulings. State and local fiscal matters. Energy policy. Tax proposals. Labor relations. Etc. Etc. There is a distinctive pro-markets, pro-freedom, pro-growth ideology at The Bahnsen Group. But even more important to you than that is this: There is a belief that we owe it to our clients to be informed about such things, to analyze potential impacts on client portfolios, and to position our investment allocations accordingly. It may be wise to keep politics out of the Thanksgiving dinner table, but when it comes to investing, we do not have such a luxury.
David L. Bahnsen, CFP®, CIMA®
Chief Investment Officer
The Bahnsen Group, HighTower