E Business Fundamentals And Valuations Trump Politics

We have used this headline before, but it bears repeating as political rhetoric is heating up as we approach the 2020 presidential election. The current impeachment hearings add to the political drama. While politics may elicit strong emotions, successful long-term investors know that business fundamentals and valuations trump politics. 

This was the case during previous impeachment proceedings. Between President Clinton’s impeachment inquiry and acquittal in 1998-1999, the stock market rallied nearly 30%. This had little to do with politics but more to do with the fact that technology stocks were bubbling higher and the Federal Reserve was cutting interest rates. On the other hand, between President Nixon’s impeachment inquiry and resignation in 1973-1974, the stock market fell nearly 30%. A recession, oil crisis and high inflation likely had more to do with the bear market at that time than politics. 

Despite President Trump’s current impeachment inquiry, the stock market has recently hit record highs with the Dow Jones Industrial Average surpassing the 28,000 milestone. This is due in part to optimism that a trade deal may be reached with China. In addition, the Federal Reserve’s accommodative monetary policy has helped the stock market rise with three interest rate cuts during 2019 to support economic growth. With low interest rates, inflation and unemployment and high consumer and business confidence, recession fears have abated—powering the stock market higher despite divisive politics. 

As we enter 2020, political pundits currently believe that we will continue to have a divided Congress after the presidential election with the House remaining in Democratic control and the Republicans holding onto control in the Senate. A divided Congress usually results in future policy changes occurring slowly. 

It is helpful to keep in mind that many campaign promises are not kept or take time to work their way through our ponderous political system. Management teams of high-quality companies successfully adapt to new economic and tax policies which change from one administration to another.

With future policy changes currently unknowable and likely to take time to become implemented once known, investors have time to make any necessary portfolio adjustments. While it may be tempting to trade on emotion depending on the political winds of the day, it rarely is prudent or profitable to do so. As Mark Twain quipped, “It ain’t what you don't know that gets you in trouble, it’s what you know for sure that just ain’t so.”

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