Remember when politicians allowed us to enjoy the last few weeks of summer and waited until Labor Day before launching their full-fledged fall election campaigns? The old way only seemed fair. Come September, the kids trudged back to school, and we adults stopped reading August’s silly-season news stories about daring pet rescues and celebrity faux pas and started focusing on the serious business of evaluating candidates for public office.
This year, however, the silly news season ended abruptly in mid-August as presumptive Republican presidential nominee Mitt Romney designated Wisconsin Representative Paul Ryan as his vice-presidential running mate. With the lines more clearly drawn between incumbent and challenger, the subsequent political rhetoric from both sides has, in my opinion, been at times outlandish and uninformative, but it hasn’t been silly. I’ve lived through enough presidential cycles—I arrived a year too late for Harry Truman’s surprise election—to know that neither pure virtue nor pure evil owns any of our elected officials. I’ve also seen enough to know that the republic and its economy have survived and prospered in the wake of some terrible policy decisions, and they will—they will have to—again. And here’s where the message lies for investors trying to protect and grow their portfolios in what’s already a difficult economic environment.
Let’s not start off by dismissing the importance for investors of the 2012 U.S. presidential election; it represents a decisive moment for several major economic issues. First, as we all know, the turn of 2013 will see a combination of tax hikes and federal spending cuts that add up to something like 4 percent of gross domestic product, enough to drag a slowly growing economy into recession if nothing is done to slow or diminish the imposition of those taxes and austerity measures. Will the lame-duck Congress act after the election to mitigate those measures? Tell me which party wins Congress and the White House and I’m still not sure I can forecast the outcome of the political game.
That so-called “fiscal cliff” is a near-term problem, but the election will decide fundamental issues about what government should and should not do to steer the economy through the next decade and beyond. With due respect for the Reagan administration, I don’t believe that we have seen a U.S. presidential election with this magnitude of economic implications since 1964. The electoral outcome could have major implications for who prospers and who does not, but at the moment the election is too close to call.
A third issue might have seemed too obscure to matter in previous elections, but it’s likely to be prominent this year and that’s the role of the Federal Reserve. Presidents and Fed officials have endeavored for the 100 years of the Fed’s existence to maintain the central bank’s independence from the partisan political process. Ben Bernanke, as an example, originally owed his Fed chairmanship to President Bush, whom he’d previously served as chairman of the President’s Council of Economic Advisors. President Obama reappointed Bernanke in 2010 maintaining continuity in this key role in a fashion that recalls President Reagan’s 1983 reappointment of Paul Volcker. Governor Romney has publically stated, however, that he intends to replace Chairman Bernanke, and Representative Ryan has also voiced strong opposition to the policies the current Fed has pursued. We don’t know whether the Fed will implement additional expansionary policy moves this year—I’m out of consensus in expecting and hoping that they will not—but we can expect considerably less intervention from a Romney-appointed Fed, should he have the opportunity to reshape its membership.
For investors, all this political uncertainty creates two kinds of difficulty. We’re used to the metrics of economic and financial analysis, GDP, inflation, trade balances, earnings, and market valuation. Forecasts are subject to considerable error, of course, but we don’t bet on one outcome (at least we shouldn’t), and trends are understandable and generally follow an economic logic. Politics feels more like a sweepstakes; our favored candidate wins or loses and then the outcome of many other contests determines what the economic implications may be. And whatever happens, unlike the constant flow of economic results, we’re stuck with the outcome for the full election cycle.
But there’s a more insidious problem: we care—a lot. We feel a passion about our political opinions that we don’t feel for our economic views, and that passion can blind us to the investment opportunities that are ours for the finding regardless of political conditions. Ask your favorite Republican, for example, if President Obama has been good for the stock market, and then ask how much of the 75 percent appreciation in the S&P 500 your red-coated friend has missed since the inauguration.
Blaming the politicians isn’t an investment strategy. Putting aside our passions and thinking critically about accepted wisdom (and pundit’s opinions) is the foundation of strategy that looks at the world as it is and looks for the creation of economic value in that world. Today’s political issues loom large, and I don’t dismiss their importance. Great economic value, however, is being created in the world while those issues wait to be resolved. Successful investors will stay focused on finding pockets of value creation for their portfolios and save their political passions for the polling booth.
Jerry Webman is the author of MoneyShift: How to Prosper from What You Can't Control and Chief Economist at OppenheimerFunds.