Does investing according to your politics make any sense? Financially, probably not. Yet, I am once again hearing “experts” on the radio who claim that they can determine the direction of the markets and the sectors to invest in according to presidential candidate and political party. This is a danger since many clients can become so stressed during election season that they feel the need to sell everything that they own to escape psychological distress. This is particularly true of those who watch cable television, which is designed to be addictive, as is the internet. I have watched people liquidate accounts because Democrats were elected and because Republicans were elected. Let us look to Europe for an example.
The recent selloff began with European Parliament elections and continued after French President Macron called for snap elections. I discussed my views on this in a recent blog post (READ HERE) where I noted that “in the past voters have sometimes voted against extreme candidates during the second round.” That is exactly what occurred last Sunday. Nevertheless, the newspapers and journals that I read have been filled with dire predictions of economic disaster that remind me of the 2022 elections in Italy, when Giorgia Meloni became prime minister.
For the heck of it, I ran a chart of the MSCI Italy index to see how investors would have fared if they bought into her election rather than sold. The result is below.
Between Meloni’s taking office on October 22, 2022, and June 30, 2024, the MSCI Italy GR (USD) appreciated 86.33%. Whatever Ms. Meloni’s relative merits or demerits, investing one’s political views proved to be a loser. Italy is firmly in the European Union (EU) and voters know that without EU support and the common currency, Italy faces ruin during periods such as the Great Recession and the Covid pandemic. Calls for extreme changes are little more than the luxury that out-of-power parties have when making extravagant claims that have no real-world impact. Responsibility calms things down.
I am not arguing that people should ignore their values. My own prejudice against marijuana stocks has saved me from losing money in that swamp even as some of my friends have lost their shirts. There are lots of good reasons to avoid dishonest companies and companies whose missions’ conflict with our deeply held beliefs. Instead, we should recognize that a change of political parties in nations with strong institutions rarely translates into actionable market decisions.
A more prudent course is to avoid investing in places that lack strong institutional protections. In the 1950s, the smart money that invested in Batista’s Cuba proved not to be very smart at all. The lack of institutional guardrails in China made that great people vulnerable to Xi. The dearth of democratic traditions in Russia and Iran makes these places investment black holes, even if both places can claim to be historically and culturally important.
Western democracies seem vulnerable because the people are allowed to publicly complain, denounce, and argue. Dictatorships have a veneer of stability that obscures their profound weaknesses. We shall all do well to keep this in mind as election results unfold in the West.