Trading the Election Outcome
After this week’s election, investors want to know how they should be changing their portfolios to better position themselves for the next 4 years.
The answer, of course, is that nobody knows for sure.
To correctly trade an election outcome, an investor would first need to know which policies are going to get implemented. These are often very different from the policies that were promised. To make matters worse, an investor would also need to correctly guess how the implemented policies would impact everything from the Fed’s decision making and inflation expectations to consumer sentiment and geopolitics.
There are no crystal balls, but even if there were, as I’ve written before, it still probably wouldn’t be enough.
For example, on Wednesday the SPDR Oil & Gas Exploration & Production ETF (XOP) was up 5.23% with the market anticipating energy companies to thrive under a Republican administration. But we’ve seen this show before.
Below is a chart of XOP for the month of November 2016 when Trump was elected the first time.
Initially, the oil and gas sector was up over 18% on huge expectations for the future. The market predicted the new President was committed to energy independence, it predicted Rex Tillerson, the former CEO of Exxon, was going to be his Secretary of State, and it predicted a business-friendly legislative agenda.
These things all came true but investors that bet on energy to outperform during Trump’s tenure still lost more than 70% because they failed to anticipate a pandemic.
Will the assets that jumped this week keep going higher for the next four years? Probably not. Will the assets that got beat up this week fall forever? Not likely either.
All we know is that the world four years from now will be different than it is today. We should expect society to advance thanks to new technologies, beautiful art, successful entrepreneurship, and breakthroughs in science. We should also anticipate setbacks like natural disasters, and international conflict. Humans will inevitably react to events in ways that don’t seem rational, financial media will do their best to scare investors, and pendulums will swing such that the party in power today will not be in power forever.
This is how it has always been, and likely how it always will be.
But if you are still reading and the idea of sitting there and doing nothing to update your portfolio makes you feel negligent, remember that rebalancing (as we have done with our client portfolios) is okay. Abandoning your long-term plan based on your current feelings of greed or fear is not.
One more chart:
In case you are wondering what happened to XOP under the Biden administration, the ETF generated a cumulative return exceeding 200%. This had little to do with the party of the President and everything to do with inflation, Omicron variants, Russia invading Ukraine, unrest in the Middle East, technology improvements, low starting valuations, and countless other factors.
I suspect it will be “the other factors” that continue to have an outsized impact over the next four years as well.
On a personal note: Happy 10th birthday to my guy, Jackson.
And for those looking for updates on our latest round of foster dogs, the puppies and their mom have all been adopted to new families through Jenni’s Rescue Ranch.
