I realized I was going to have to write something for Election Day a couple weeks ago.
Wait wait wait, stay with me for a minute here. I have something worth your while, I swear.
It took until yesterday to get a good idea of why I both should and shouldn’t bother. I think addressing this duality is worthy of our attention, and I’m not seeing much of anyone else doing it.
I knew I’d have no intention of talking about politics from the start. We’re all adults here and I have no intention of saying what is better for you, nor what you should believe is better for us all.
My esteemed colleagues wrote about stocks that will do well if Biden or Trump wins last week. They were spot on, in my opinion. Those are small parts of the market that we can use to our advantage, and certainly should watch going forward.
I’m going to take a much broader brush to this though, and address the broader market moves we can expect in the coming days or weeks. It doesn’t matter who wins in the least.
If you think our economic fate is hinging on the election, you’re almost certainly wrong. As soon as we have a winner we’ll be fine.
The economy is a lot like the general election. A whole lot of people have a say, most have an inconsequentially small influence, some have an outsized one, and we’re dependent on the whole of it to determine any outcome, whether it is for the best or not.
For this election, like many other market events, it all boils down to the limited role that government can play in the economy and the stock market itself, which are not the same thing at all.
Just look at oil prices. They’re set on an international stage and with international influences that far outweigh domestic ones.
Presidents will claim that they kept prices low at the pump for you if it is convenient though. Or they’ll blame anyone else, especially their predecessors, for any rises.
Fossil fuel energy prices are far from alone here. Solar had large government subsidies for a long time, but that was just a thin layer of “icing on the cake” while China flooded the USA and Europe with cheap panels, which drove massive deployment and drops in total cost.
Today solar is the cheapest form of large-scale energy production in many parts of the world. Obama didn’t make that. The market did.
The list could go on and on, but the fact of the matter is that credit is claimed where credit isn’t due, and only when it is convenient.
In reality, the market is going to react more to its own anticipation of the election than to the election itself by closing out some positions and creating new ones.
If this seems weird and vague, think about it this way with a basic example.
Tesla announces it will make a half million cars in a year and post some quarterly profits.
This is polarizing in the stock market. People can look at public statements and find reasons why that is or isn’t probable. They then position themselves according to analysis and conviction.
This buying and selling activity front-runs the actual announcement regarding the actual results Tesla accomplishes. Once the results are in the aggregate of all of these individual positions becomes the headline — “Tesla [Rises/Falls] After Announcing Production Targets.”
This isn’t a headline about approval or agreement. It is a headline about profit potential outlooks from existing positions (or lack thereof), and it isn’t a useful one.
It is a headline about investors, mainly very large ones, repositioning their holdings.
The same will happen with this election tonight, and through this week.
Some anticipation and speculation will play out and stocks will be sold.
Some new anticipation and speculation will be created and stocks will be bought.
They will be buying the rumors about what people think and they’re going to sell once speculation is no longer possible because probability has collapsed into certainty.
We see it after positive quarterly reports all the time. We see it after companies like Tesla meet or miss their targets with press releases.
And we most certainly see it after elections remove uncertainty, the market agrees on a direction, and the arbitrage potential collapses into reality.
We’ll get headlines saying that Wall Street reacted positively or negatively to election news. It will not reflect on the economy or broader market. It will reflect on their new outlook for what they already own or now wish they owned.
What kind of money an investor will make is determined long before the outcome, or catalysts, that their profit depends on is announced.
Once a clear direction is found, the game is over.
Hence, “buy the rumor, sell the news.”
This election is a big one for that. They all are, but maybe this one more than most in the last couple decades. A lot of traders will sell some stuff and buy others. Money and shares will change hands.
But there is always more uncertainty to come.
The election won’t settle anything about how the market reacts to even more Fed intervention and its ballooning balance sheet. That has a far longer timescale.
It won’t settle anything about government debt, which has ballooned under President Trump from tax cuts and will balloon even with tax increases with larger government spending by Biden.
It won’t settle anything about the shifting globalization paradigm as the USA, EU, and China become increasingly at odds with each other.
The list goes on and on.
It will settle a lot of speculative trades that were put in place days, weeks, or months ago though.
It will create a lot of new ones too. We’ll be watching closely. I hope you stay tuned to see how we can make whatever comes from this election work for us.
