When Washington Meets Wall Street

There’s an old saying that “All politics is local,” which means regardless of the scope of the issue – national or global – voters form their opinions and make their choices based on how they will be personally impacted by the outcome.  That’s certainly true when it comes to voters and the economy.

Since 1928 the S&P 500 has correctly predicted the winner of 19 of the past 22 presidential elections.  If stocks are higher in the three months leading up to the election, the incumbent party wins and vice versa.   Makes sense, right?  Voters look to the stock market – rightly or wrongly – as an indicator of the health of both the economy and their personal financial prospects.  If things are on the down swing, people look to make a change at the top.

sp500 vs incumbent party

As you will see from the above table, the S&P 500 is 8 for 8 in predicting every Presidential election since 1984.

But how much control does Washington really have over the economy?  Does it matter whether Democrats or Republicans control the White House?  History would seem to indicate the stock market has traditionally done better under Democrats, as indicated on the chart below.  But I’m skeptical.  This data includes the tech boom that Bill Clinton enjoyed but did not create, during which annual returns averaged 18%, and the inevitable post-Great Recession stock market recovery that occurred during the Obama years.

republican vs democratic term avs sp return

That said, there is no question the federal government wields incredible influence over individual industries and companies through legislation, regulation, and $530 billion in annual purchases.  Decisions made by lawmakers and regulators in Washington, DC can make or break a company or industry.  This reality should be factored into your investment decisions.

Consider the recent fate of two very different industries.  Under President Obama’s Affordable Care Act, the healthcare sector has seen an explosion of revenue growth from newly insured people.  The coal sector, meanwhile — already weakened by competition from natural gas (the Democrats’ favorite fossil fuel) and tough clean air standards – have clearly been targeted by the Democrats who want to put the industry out of business.  Look at the result in the chart below.  Five of the biggest coal companies are currently in bankruptcy, including the largest, Peabody Energy.  Of course, there are numerous factors that impact individual company and sector stock performance.  The political environment alone doesn’t bear all responsibility for the chart below, but it is difficult to deny that policy hasn’t played a significant role.

Screenshot_051816_051340_PM
Red – Healthcare Select Spider ETF (XLV)
Blue – Peabody Energy Corporation (BTU)

No wonder industry groups and companies spend about $2.6 billion per year on lobbying to influence Washington’s legislative, regulatory and spending decisions. Among the most active companies this year in Washington:

Alphabet (Google) — The company has spent $3.8 million in 2016 to influence a variety of policy debates.  Copyright, patent and trademark issues dominate its agenda.

Blue Cross and Blue Shield – The insurance giant has invested $6 million on issues related to federal tax law, Medicare and Medicaid, and federal appropriations.

Pfizer – Taxes, trade policy, and Medicare/Medicaid are the focus of the pharmaceutical company’s $3.4 million lobbying effort.

Boeing – The defense contractor has dropped a $4.5 million to influence – you guessed it – military purchasing decisions.

Exxon Mobile – The oil behemoth has invested $3.3 million to sway lawmakers and regulators and a plethora of energy policy matters ranging from import/export issues to safety and environmental proposals.

As an investment professional, I’m always looking for new opportunities to tap into a company’s success and growth.  There is unquestionably a correlation between effective corporate lobbying efforts and increased company earnings.  However, determining what companies most effectively do this is a complex process.

The companies that are most effective in Washington can benefit by winning contracts and/or securing favorable legislative or regulatory treatment, all of which can boost revenues and bolster a company’s stock performance.

This is a topic that my investment committee and I have spent many hours researching.  If you would like help determining how politics may impact your portfolio and retirement, our team is here to help.

The debate over money’s role in Washington will never end.  Is it corrupting?  Is another form of free speech?   Either way, if you invest in the right companies, you just might reap some benefit from the Washington-Wall Street game.

 

 

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.

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