It seems as though every four years, investors start wringing their hands over the presidential election and the impact it could have on the economy and the markets. Since the stock market was created, investors have attempted to find some correlation between election results and stock market performance, asking whether a particular election outcome will impact their portfolios and whether a win by either party warrants a change in their portfolio strategy.
While there seems to be some data that supports some correlation between elections and stock market performance, it doesn’t conclusively show that the relationship is a causal one deserving of strategic consideration. However, it does make for interesting fodder for the water-cooler crowd.
The Future is Always Uncertain, Regardless of Who’s in Office
We look at the presidential election as we do any other event – we mostly ignore it. Why? Because, while the election appears to be a predictive event – held on a specific day on the calendar as a seemingly binary choice between two candidates – in reality, the future is always uncertain, regardless of who wins.
The future is never binary, and it’s not predictable in a way that can be profitable. The COVID pandemic and the indiscriminate global economic meltdown has been the mother of all binary events, yet the stock market is now flirting with new highs. Who could have possibly predicted that?
Investing in Politically Agnostic Companies
We know that, since World War II, the market has always come back from severe shocks, which is why we bank on the future. But we also know that certain types of businesses can better navigate severe shocks better than others, which is why our strategy is focused on buying quality businesses at a great price. That pandemic is demonstrating the veracity of this approach as our companies are navigating these challenging conditions very, very well.
Very few of the companies we own would be considered either “red” or “blue,” businesses that benefit more or less based on which party is in power. We consider nearly all the companies in our portfolio to be politically neutral – not likely to be harmed due to policy decisions by either political party. For example, we own F5 Networks (NASDAQ: FFIV) – a business that focuses on cloud-based server application management and security. F5’s future growth doesn’t rely on red or blue policies because everyone recognizes the need for better, safer, and more reliable cloud-based services.
We do own one “red” and one “blue” company. The red company – Strategic Education, Inc (NASDAQ: STRA) is a for-profit provider of online education. After digging itself out of a bottomless hole created by Obama administration policies, the company is now thriving again. The previous administration tried to bury the for-profit education industry, resulting in many for-profit education companies filing for bankruptcy.
However, STRA is a well-managed, high-quality company, which is why we own it. And, as we would expect with a quality company, STRA managed to emerge as an even stronger company and has been on a growth tear since. It’s likely that, if the Democrats retake power, it could make things difficult for STRA. But, a big part of the company’s growth strategy is overseas diversification, which will reduce its exposure to U.S. political risk.
We also own one “blue” company – Sturm, Ruger & Co. (NYSE: RGR) – another high-quality company that manufactures pistols, revolvers, rifles, and semi-automatic firearms. RGR is a contrary indicator for us because the threat of stricter gun laws under a Democratic president typically leads to an increase in gun sales, as happened under Obama. In fact, when Trump was elected, people were no longer in a hurry to buy a gun, so gun sales fell significantly.
Election Outcomes Already Baked into Stock Prices
The problem for investors attempting to choose winners and losers based on election results is that they are chosen long before the election. Any possible outcome as a result of the election has already been baked into stock prices. If you want to see what that looks like, consider the following chart. The chart plots our red and blue companies’ stock performance, STRA, and RGR, over the last three months – prior to the election.
As you can see, the performance difference between these red and blue stocks is very stark—about a 45% stock price difference in just three months. The difference grew to be 65% at one point recently, but there was probably some profit-taking in RGR, which brought the stock price down in the last few weeks.
My point is that, if we had any intention of investing according to some conviction to play the election, that ship most likely has already sailed. Private equity, hedge funds, and other institutional investors have cast their bets. But fear not, because we don’t make bets with our clients’ money. Playing the election is not our approach, and it is not how we plan on making money now or in the future.
The key takeaway is that principled and disciplined long-term investors don’t invest for an election cycle; they invest for a lifetime.
