Investors' Column... Politics Trumps Economics


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Money Matters

April 27, 2021 by Scott Crosby

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Investors' Column... Politics Trumps Economics

On average, the stock market gains in value about ten percent per year.  But as we all know, each year is different.  Some years the market does better than that; some years it does less well.  Some years the stock market actually declines.  

What causes that variability?  

S59-1.jpgThe most fundamental change is the growth or change in the business environment.  In the late 1800s, steel producers and later oil producers were the big gainers.  In the 1920s, the automobile industry was a dominant factor.  In the late 1990s, computer technology stocks were the growth sector.  In the 2000s, smartphones replaced cellphones, and demand skyrocketed world-wide.  The tech stocks were the market leaders.

But that innovation and productivity is not unfettered.  It lives in a political environment.  In the worst of political environments – where government oppression and control are most severe – innovation and productivity are stifled; they are virtually nonexistent.  Countries like Indonesia, Libya, Afghanistan, Mauritania, Bolivia, and Cuba are good examples.

Even in countries which are considered relatively free, such as the United States, the actions taken by government frequently affect the economy.  

America’s worst example is the Depression of 1929.  The decade of the Roaring Twenties was fostered by the relatively greater economic freedom enjoyed under Presidents Harding and Coolidge.  

President Hoover, elected in 1928, was of a different character.  Under Hoover, the Smoot–Hawley Tariff Act crippled imports; other countries responded with their own high tariffs.  Trade world-wide was reduced 67%.  The Great Depression was the result.   

The worst depression of all time – the economic disaster which ultimately lead to the onset of World War II – was caused by the United States government.  

The restoration of the American economy to the level it had been prior to October of 1929 required twenty-five years – the longest recovery period of any recession in our history.  That quarter-century far exceeds the normal recovery of months or a year or two for normal business downturns.  Blame Presidents Hoover and Roosevelt, and Congress

The Great Recession of 2008 was the result of another massive mistake by Presidents Clinton and Bush:  their support for the Community Reinvestment Act (CRA).  Some banks collapsed; others were ordered to take actions against their normal policies, or forced into mergers with other banks.  The housing market was crippled, and for a time, obtaining a new home mortgage became very difficult, due to additional legal changes.

For investors, their losses in late 2007 and early 2008 would not be recovered until almost the end of 2010 – the economy took three years to recover.  The Dow Jones Industrial Average fell from 14,000 to an incredible low of 6,000.  The Great Recession of 2008 would never have occurred, except for the consequences of government meddling in the economy:  trying to make the economy be something different from what it is.

The impact of government policies is not always so apparent.  One of President Biden’s first actions was to revoke the licensing for the Keystone pipeline construction project.  The immediate impact: tens of thousands of lost jobs.  There was no immediate, obvious impact.  But the effects will reverberate through other parts of the economy:  higher prices at the gas pumps, reduced sales levels for household items, and certainly reduced sales of optional “luxury” items – like Christmas toys.

If President Biden’s the $2.1 trillion passes in Congress, there will be an impact on your investments.  Make your investment choices with that in mind.

The most ever-present example of the government’s impact on the economy is the news reports concerning the monthly meetings of the Federal Reserve – the “Fed”.  Stocks will swing remarkably due to expectations leading up to those meetings, and then swing again to the reality afterwards.  The Fed’s comments may be fairly benign or major, but investors everywhere will try to read into those comments some portent of the future.  The resulting impact on stock prices is rarely trivial.  

Stay informed about the political environment, and make a habit of considering the economic implications.  Politics trumps economics.

Next Month:  Investment Strategies and Goals.?

 

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