Investing In An Election Year [Read It And Eat 24/06]

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Major Headlines:

• The World’s Most Valuable Company:
• Chip-maker Nvidia became the world’s most valuable company after its share price climbed to an all-time high on Tuesday. It is now worth $3.34tn (£2.63tn), with the price having nearly doubled since the start of this year. The stock ended the trading day at nearly $136, up 3.5%, making it more valuable than fellow tech giant Microsoft. It overtook Apple earlier this month. The Californian company’s meteoric rise has been fuelled by its dominance of what analysts call the “new gold or oil in the tech sector” — the chips needed for artificial intelligence (AI). To put into context what $3.3tn looks like, if you spent $4 million every single day since the day that Jesus Christ was crucified, you still would not have spent $3.3 trillion. What is not in doubt though is how spectacularly it has grown. Eight years ago, the stock was worth less than 1% of its current price. Back then, Nvidia’s value came from its competition with rival AMD, in a race to make the best graphics cards. In recent years though it has benefited from a boom in demand for chips that train and run generative AI models, the most well-known of which being OpenAI’s ChatGPT. The firm also benefitted significantly from a rush to mine Bitcoin in 2020, which saw a sharp uptick in sales of its graphics cards. The rise and rise of the tech giant has been mirrored by the increasingly high profile of its boss, Jensen Huang. Meta boss Mark Zuckerberg even called the 61-year-old electrical engineer — known for his signature leather jacket — the “Taylor Swift of tech” for the celebrity status he has achieved. He’s become well-known thanks in part to his popularity in his native Taiwan, where fans treat him as a rock star — posing for photos and even asking him to sign body parts. [Financial Times]
• Apple AI stalled within and because of the EU:
• Apple will delay launching three new artificial intelligence features in Europe because The European Union competition rules require the company to ensure that rival products and services can function with its devices. The features will launch in the fall in the US but will not arrive in Europe until 2025. The company said on Friday three features — Phone Mirroring, SharePlay Screen Sharing enhancements, and Apple Intelligence — will not be rolled out to EU users this year because of regulatory uncertainties due to the EU’s Digital Markets Act (DMA). Apple said the EU’s regulations would force it to compromise its devices’ security, an argument it has made before and that EU officials have pushed back on. “Specifically, we are concerned that the interoperability requirements of the DMA could force us to compromise the integrity of our products in ways that risk user privacy and data security,” Apple said in an email. In a statement to Bloomberg, the European Commission said Apple would be welcome in the EU provided it followed the laws there. Earlier this month, the company debuted Apple Intelligence at its annual developer conference, a suite of artificial intelligence features that integrate ChatGPT and Siri to search the web and generate images or text. When the next version of Apple’s mobile operating system is released later this year, the assistive features will also be able to look through a phone’s emails, texts and photos to find specific information based on a user’s prompts. The company said the features would be available on iPhone 15 Pro, iPhone 15 Pro Max, and iPad and Mac with its M1 chip and later versions. iPhone Mirroring on MacOS Sequoia allows the phone’s screen to be viewed and interacted with on Mac computers. “We are committed to collaborating with the European Commission in an attempt to find a solution that would enable us to deliver these features to our EU customers without compromising their safety,” Apple’s statement read. [Reuters]
• Boeing The Reason Why Astronauts Stuck In Space:
• Two NASA astronauts who rode to orbit on Boeing’s Starliner are currently stranded in space aboard the International Space Station (ISS) after engineers discovered numerous issues with the Boeing spacecraft. Teams on the ground are now racing to assess Starliner’s status. Astronauts Butch Wilmore and Suni Williams were originally scheduled to return to Earth on June 13 after a week on the ISS, but their stay has been extended for a third time due to ongoing issues. The astronauts will now return home no sooner than June 26th, according to NASA. After years of delays, Boeing’s Starliner capsule successfully blasted off on its inaugural crewed flight from Florida’s Cape Canaveral Space Force Station at 10:52 a.m. EDT on June 5. But during the 25-hour flight, engineers discovered five separate helium leaks to the spacecraft’s thruster system. Now, to give engineers time to troubleshoot the faults, NASA has announced it will push back the perilous return flight, extending the crew’s stay on the space station to at least three weeks. “We’ve learned that our helium system is not performing as designed,” Mark Nappi, Boeing’s Starliner program manager, said at a news conference on June 18. “Albeit manageable, it’s still not working like we designed it. So we’ve got to go figure that out.” The return module of the Starliner spacecraft is currently docked to the ISS’s Harmony module as NASA and Boeing engineers assess the vital hardware issues aboard the vessel, including five helium leaks to the system that pressurises the spacecraft’s propulsion system, and five thruster failures to its reaction-control system. NASA announced on Friday that Starliner’s troubleshooting has been extended for a third time, meaning that the astronauts will stay aboard the International Space Station indefinitely until some time in July. [New York Post]
• The Tories Are Haemorrhaging Their Voters:
• The Conservatives have lost up to a third of voters who planned to back the party just four months ago, according to an Ipsos poll for the Financial Times that points to high levels of volatility ahead of the UK election on July 4. The survey, conducted on the same cohort of almost 16,000 voters at the end of January and at the start of June, found that 32 per cent of people who initially said they would vote Conservative had since changed their minds. Rightwing party Reform UK attracted 8 per cent of the Tory voters polled, 6 per cent switched to Labour, 7 per cent said they were now undecided and 9 per cent said they were less likely to vote at all. Despite the high rate of switching, the poll showed little change in the overall support for each of the main political parties, with the Tories’ share of those polled falling from 14 to 13 per cent and Labour increasing its share over the period from 26 to 27 per cent. While the Conservatives lost voters to Labour and Reform, they also gained backers among those who had previously said they were undecided. This group has commonly turned out for the Conservatives in recent elections. Labour — which opinion polls suggest is likely to sweep to power on July 4 — also experienced high levels of turnover, losing a quarter of people who previously said they were planning to vote for the party, of which 3 per cent said they were now undecided and 9 per cent less likely to vote. The party lost 4 per cent of its voters to the Lib Dems, some of which are likely to be tactical switchers trying to oust Tory candidates, but Labour gained 16 per cent of those who had previously been planning to vote Lib Dem. Rob Ford, professor of political science at Manchester University, said the Ipsos findings demonstrated that “surface stability has a lot of churn underneath it”. “We’re likely to see a lot more churn than in previous elections because partisanship is lower than we’ve seen in the past and fragmentation between different parties is higher,” Ford said. The proportion of British voters who switch their preferred party between general elections has shifted from about 13 per cent in 1960 to closer to 60 per cent today, according to research from Oxford and Manchester universities. [Financial Times]

Minor Headlines

• Nvidia launched its first large-scale operation in the Mideast (Reuters)
• Apple and Meta discussed an AI partnership (Wall Street Journal)
• Sony Music is reportedly acquiring Queen’s music catalogue for ~$1.3B (Yahoo News)
• American Express will acquire Squarespace-owned restaurant booking platform Tock for $400M (Reuters)
• OpenAI acquired enterprise search and analytics startup Rockset in a nine-figure stock deal (RT)
• KKR agreed to acquire European music festival owner Superstruct Entertainment in a $1.4B deal (Financial Times )
• Ghana reached an agreement in principle to restructure $13B worth of international debt (Reuters)
• Israeli Defense Minister Yoav Gallant arrived in Washington, DC, for meetings with US officials about Gaza and Lebanon. [The Guardian]

NEWS OF THE DAY:

Investing In An Election Year.

Even though most countries have a 4-year cycle of elections it has actually never been that this many people and this many countries are slated to, or have already voted for the leader of their country. It is estimated that at the end of 2024, about 4 Billion people will have participated in their country’s election, a scale unprecedented in human history. Historically, no single year has seen this many people eligible or participating in elections worldwide. To put this in perspective, the most populous democratic elections have typically been in India, with its general elections drawing around 900 million eligible voters in recent years. For context the following countries are expected to undergo an election this year.

• The United States: Presidential and Congressional elections
• India: General elections.
• European Union: Parliamentary elections involving multiple countries.
• Indonesia: Presidential and legislative elections.
• Brazil: General elections.
• Russia: General Elections
• The United Kingdom: Parliamentary and General Elections

It is not unreasonable for me to say that elections have consequences and that the selection of who is in political power may have an effect on the general economy. This is due to the changes and promises of their economic policies in terms of interest rates, taxes, public infrastructure, corporate taxation incentives, governmental oversight and intervention. Even policies that determine the amount of funding to government bodies. For example, greater funding towards the Inland Revenue Service or His Majesty’s Revenue Commission would lead to a more robust department that would be able to dedicate more resources and time to those who are wealthier and are using complex financial vehicles to circumvent the tax laws in order to reduce the total amount paid in taxes. Another example would be the fact that there are policies that give direct tax exemptions to local manufacturers of electric vehicles like Tesla while increasing the import tariffs on other electric vehicle manufacturers like BYD.

It wouldn’t be unreasonable to believe that there would be rippling effects on the economy as a whole due to these policies so much so that it may cause people to be more wary or “play defence” in their investments in a year such as this. A low-hanging fruit would be the fact that the United States Congress, Senate and President passed a law that directly banned the social media giant TikTok, such a decision had direct effects on the company’s value, although privately held. All these are true but not the whole truth and many things aren’t considered or are being deliberately omitted because it does not support the narrative they wish to proffer.

Disclaimer: I must state the information contained on this website and the resources available for download through this website are not intended as, and shall not be understood or construed as, financial advice. I am not an accountant or financial advisor, nor am I holding myself out to be, and the information contained on this website is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation. I have done my best to ensure that the information provided on this website and the resources available for download are accurate and provide valuable information. Regardless of anything to the contrary, nothing available on or through this website should be understood as a recommendation that you should not consult with a financial professional to address your particular information. Read It And Eat News Corp expressly recommends that you seek advice from a professional. Neither the Company nor any of its employees or owners shall be held liable or responsible for any errors or omissions on this website or for any damage you may suffer as a result of failing to seek competent financial advice from a professional who is familiar with your situation.

I am a Barrister and Solicitor of The Supreme Court of the Federal Republic of Nigeria with a Master’s Degree in Law, who is 6ft 5in, 130kg+ on a good day and well-versed in the art of hand-to-hand combat for self-defensive purposes. I am also in no way shape or form vying or campaigning for any political party/candidate to emerge victorious, nor am I urging anyone to vote for a specific political party, candidate or ideal and nothing in this website or the resources provided should be construed or understood as such. Finally this is going to be a considerably lengthy piece.

The Four Myths of Investing In An Election Year.

Myth 1: Elections Always Bring Market Volatility.

The media often amplifies the narrative that an election year brings exceptional volatility to the economy and markets, particularly when the incumbent and their challenger present starkly contrasting policies. On the surface, this notion appears validated by extreme market movements, such as Nvidia’s astounding $300 billion surge in market capitalisation within just 15 days, or the notable uptick in bank collapses this year in the United States.

However, this perspective only scratches the surface. While the market has indeed experienced significant fluctuations this year, it’s important to understand that volatility is not unique to election years. Historical data reveals that market volatility is a consistent feature, manifesting similarly in both election and non-election years. The heightened perception of instability during election cycles is often a reflection of the media’s focus on political drama rather than a fundamental change in market behaviour.

Therefore, it’s crucial to maintain a balanced view and recognise that while elections can bring momentary uncertainty, they are just one of many factors influencing the market. The intrinsic volatility of financial markets, driven by a multitude of economic, geopolitical, and corporate events, persists regardless of the electoral calendar.

Myth 2: Election Outcomes Dictate Long-Term Market Trends.

A common misconception is that the results of an election have a deterministic impact on long-term market trends. While elections can create short-term volatility and influence specific sectors or policies, they are not the sole drivers of market performance over the long term. Broader economic factors such as global economic conditions, interest rates, corporate earnings, technological advancements, and geopolitical stability play a far more substantial role in shaping long-term market trends.

Historical data suggests that market performance over extended periods does not align neatly with political cycles or the party in power. For instance, both Republican and Democratic administrations have overseen periods of economic growth and recession. The stock market, driven by a multitude of factors, often reacts more to the underlying economic fundamentals than to the political landscape. Factors such as innovation, productivity, and consumer behaviour have a profound impact on economic growth and market trends, often outweighing the political climate.

While election outcomes can have immediate effects on market volatility and sector-specific policies, they are just one of many factors that influence long-term market trends. Investors should adopt a holistic approach, considering a range of economic indicators and global developments rather than focusing solely on political changes. By understanding the broader economic context and maintaining a diversified investment strategy, investors can better navigate the complexities of the market and achieve long-term financial goals. It’s essential to recognise that the market’s long-term trajectory is shaped by a complex interplay of factors, with election outcomes being just one piece of the puzzle.

Myth 3: Avoid Investing Until The Election Results Are Over

When it comes to investing during an election year, conventional wisdom often suggests adopting a more cautious and conservative approach. The thinking is that the uncertainties surrounding political outcomes might warrant pulling back on riskier investments, such as those in emerging sectors like renewable energy. Some investors might even avoid certain industries if one or more candidates have pledged significant policy shifts that could impact those sectors. Additionally, there is a common belief that a recession could be looming, prompting some to consider shifting their portfolios towards less volatile assets or even liquidating positions to stay cash-heavy and shield against potential market downturns.

However, such advice, while seemingly prudent, could actually be counterproductive. Take, for instance, the tech giants commonly referred to as the “Magnificent 7” — Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta. Had an investor sold off their holdings in these companies ahead of the 2019 election to avoid market uncertainty, they would have missed out on substantial gains. Those who remained invested saw their portfolios benefit significantly, with average returns of around 70% and Nvidia’s stock skyrocketing by almost 700%.

The key takeaway here is that the best time to invest is always in the present, regardless of the political climate. Market volatility is a constant, not an anomaly of election years. Thus, rather than retreating from the market, investors should focus on adjusting their strategies to account for potential risks and opportunities. It’s important to build a resilient portfolio that can weather various economic scenarios, including potential policy changes that might arise from an election. Instead of fearing market downturns, investors should position themselves to capitalise on the long-term growth potential that well-chosen investments can offer.

Myth 4: Political Parties Significantly Affect Stock Market Performance.

When trying to posit that who you elect would have a monumental impact on the stock market the examples used would be things like how the government would dictate monetary policy such as what tariffs would be imposed on what industries or the fact that there would be laws passed would specifically target companies that may seem monopolistic in order to break those companies up citing the administration that broke up Standard Oil, Getty Oil etc. They would also cite examples of those administrations that bailed out distressed companies during tumultuous financial times such as the government bailouts of 2008 and 2020 and say that the government makeup would be better for the economy than another.

However, there are a multitude of important factors that are deliberately omitted to ensure that the narrative being portrayed is believed and taken as true. Even though on face value this may have some truth to it, isn’t it. A major factor that is being omitted is the fact that there are many independent governing bodies whose leaders although may be appointed by the leading party operate apolitically. For example, the Department Of Justice in the US has sued the majority of the Magnificent 7 for antitrust violations in the last 3 non-election years. The Financial Conduct Authority in the UK has also taken legal action against major financial institutions for violations of the financial markets. The United States Securities and Exchange Commission has frequently led criminal investigations into companies big or small that infringe on securities laws. This is done regardless of who was elected as president or in Congress.

Companies are also not static entities, they are run by incredibly intelligent people who employ other incredibly intelligent people to ensure that they are able to not only be compliant but to adjust and pivot their business strategy with profitability and/or growth in mind. With the perspective of maximising shareholder value and ensuring the longevity of the company, these people would do their best to ensure that as long as they remain apolitical in their dealings such as official statements and donations. Most companies would have their compliance and risk teams preemptively produce risk assessments on the policies of these candidates and/or party’s manifestoes and intended policy changes to understand its impact on the business itself, ways they would remain compliant and worst/best case scenarios to be implemented on the time of the announcements.

Historical data within America shows that when a Republican president is elected there is a 49% increase in the stock market, 46% for a Democratic President and every combination of President and Congress falls between 41% and 49% and all elections aggregated to a total of a 47% increase in the stock market performance. In essence, the data shows that the market, with certain deviations not tied to the political candidate/party, always goes up to the right over time.

Interest Rate Changes

In the last piece on this blog, “The Power of Powell” I discussed how changes in interest rates affect various sectors, from stock markets and private equity to hedge funds and everyday citizens. This discussion is particularly relevant now as the Federal Reserve is anticipated to cut interest rates in September, just a few months before the upcoming election. This timing could ostensibly benefit the incumbent president, as lower interest rates might boost economic confidence and sway voter sentiment.

However, some sceptics argue that the president could exert pressure on the Fed to reduce rates to gain electoral advantage. While this might sound plausible, historical data suggests a different story. Major interest rate adjustments before elections have typically occurred in response to significant economic crises, such as the 2008 financial collapse and the 2020 pandemic-induced recession, rather than electoral manoeuvring. These extraordinary financial upheavals were the primary catalysts for rate changes, not the political calendar. Thus, while the timing might seem politically motivated, it is often the underlying economic conditions that drive such decisions.

The Presidential Election Cycle Theory

The Presidential Theory or the Presidential Election Cycle Theory posits that equity market returns follow a predictable pattern each time a new U.S. president is elected. The theory was developed by Stock Trader’s Almanac founder Yale Hirsch. According to this theory, U.S. stock markets perform weakest in the first year of a term, then recover, peaking in the third year, before falling in the fourth and final year, after which point the cycle begins again with the next presidential election.

The guidebook became a popular tool for day traders and fund managers hoping to maximise their returns by timing the market. The almanac introduced a number of influential theories, including the “Santa Claus Rally” in December and the “Best Six Months” hypothesis, which proposed that stock prices have a tendency to dip during the summer and fall. Hirsch’s aphorisms also included the belief that the four-year presidential election cycle is a key indicator of stock market performance. Using data going back several decades, the Wall Street historian posited that the first year or two of a presidential term coincided with the weakest stock performance. According to Hirsch’s theory, after entering the Oval Office, the chief executive has a tendency to work on their most deeply held policy proposals and indulge the special interests of those who got them elected. As the next election looms, however, the model suggests that presidents focus on shoring up the economy in order to get re-elected. As a result, the major stock market indices are more likely to gain in value. According to the theory, the results are fairly consistent, regardless of the president’s political leanings.

Similar to the myths, on the surface this may sound true as it is believable that the incumbent may want to make up the the years of poor performance and unrealised promises by delivering returns to the market in order to be in the good graces of a select and powerful sect of a voting block. The whole truth is, vast number of factors can impact the performance of the stock market in a given year, some of which have nothing to do with the president or Congress. However, data over the past several decades suggest that there may in fact be a tendency for share prices to increase as the leader of the executive branch gets closer to another election. In 2016, Lee Bohl, a Charles Schwab researcher, analysed market data between 1933 and 2015, and found that, in general, the third year of the presidency overlapped with the strongest average market gains. The S&P 500, a fairly broad index of stocks, exhibited the following average returns in each year of the presidential cycle since 1933:

• Year after the election: +6.7%
• Second-year: +5.8%
• Third-year: +16.3%
• Fourth-year: +6.7%

Since 1930, the average annual rate of return for the S&P 500 was 6.34%, adjusted for inflation. So while the numbers don’t show a sizeable dip in years one and two, as Hirsch predicted, it appears there truly is a third-year bump on average. However, averages alone don’t tell us whether a theory has merit. There’s also the question of how frequently this third-year bump occurs. Between 1933 and 2019, the stock market experienced gains in 70% of calendar years. But during year three of the presidential election cycle, the S&P 500 saw an annual increase 82% of the time, demonstrating a notable consistency. By comparison, the market gained 59% of the time during both years one and two of the presidency

So How Do You Invest In An Election Year

How you approach investing during an election year is considerably more important than what you purchase as an investment. That means, what are your long-term investment goals? What are your short-term accomplishments intended? What is your risk appetite in terms of investing? How effectively are you able to detach your emotions from investment decisions and rely on the numbers? How well have you trained your gut?

These inquisitive questions would call you to question and rationalise any and all information that you are being told. It is important to approach investing from the position of comfortability, whereby you have a fully topped up emergency fund that can tide you over and cover your monthly expenses for a minimum period of nine months, then you start small by saving money in a high-yield savings account or an ETF such as Vanguard or the BlackRock ETF. Then when you gain a taste of that you can go the traditional route of investing in a Stocks and Shares ISA, or a Lifetime ISA (ISA= Investment Savings Account) if you are in the UK or a RothIRA if you are in America.

After a few months and or years of this then I suggest you speak to a certified financial planner or private banker to discuss other investment avenues. In this meeting, one of the things they would discuss with you is your risk appetite. In essence, he or she would inform you that your Principle would always be at risk of being wiped away or incurring a loss however they would state to you that the riskier the investment, the higher the payoff would be as such they’re trying to figure out if you would be comfortable in putting your money in extremely volatile cryptocurrencies and crypto ETF like the BlackRock one or if you are comfortable in investing in much safer financial instruments such as a government bond or anything in between. At this point, you have to decide if you are comfortable with taking riskier or safer bets. Sometimes you may subscribe to a combination of financial instruments, for example, you may choose to invest your Short-term savings in extremely risky investments as a negative outcome that would not have such a devastating effect on your financial situation and then simultaneously opt for your children’s tuition fund to be invested with the S&P 500 because you understand that the compounding returns over a period of 20–25 years would be tremendously beneficial to the recipients when it is time to withdraw from it.

Furthermore, you may choose to open your own trading account and choose individual stocks to trade. This approach is more hands-on and a lot riskier as there is a possibility that you would be wiped out (lose all your money). There are a few platforms that mirror specific people’s trading accounts and invest in the same way they do. These platforms usually advertise that they would invest like members of Congress. This is because, due to acting privileged information, Congress people like Nancy Pelosi are privy to they have been able to time the market and are now worth hundreds of millions of dollars, [allegedly]. These platforms are able to mirror these trades as the congresspeople are legally bound to file these trades within a specific timeframe of making them.

Finally, and it is most frustrating that I would have to address this. Courses are great, they allow you to experience and learn things like financial instruments such as derivatives, spot trading, arbitrage, crypto and FX etc, however, if you are ever offered or advertised a trading course that is ‘guaranteed to make you profit’ approach it with an overwhelming amount of cynicism and scepticism. For starters, nothing is guaranteed in life and even less so in the world of finance. Hedge Funds historically do not present returns that exceed the returns of the S&P 500 and they spend millions paying analysts and associates for information and spend even more money on softwares like Bloomberg terminals etc in order to gain more insight and information in the market. Some firms spend millions yearly to have faster and more powerful computing power that in reality is about 1%-3% better than the previous year’s and this is because even though the improvements are minuscule, they may be the difference between profits and losses in the hundreds of millions or even in the billions of dollars. I say all that to say that the course being advertised to you who doesn’t spend any time or money and claims to be investing in penny stocks or meme coins and sends their picks for the day/week is almost certainly a pump and dump scheme, if the person is claiming that if you give them your money they would invest and bring you returns that exceed the S&P 500 is almost certainly a Ponzi scheme and if they are claiming that if you buy their course which is 80% off for a limited time only they’re fraudulent and are looking to upsell you to oblivion (they would leave ‘pivotal’ information out and tell you to pay for the next course over and over again). If you wish to actually learn these things, there is a myriad of free information online and if you wish for a more detailed course, use a nationally or globally accredited platform such as CISI, or even entry-level platforms like Coursera, Masterclass and Udemy

Conclusion

In all this, it is important to speak with someone who is certified [so that they and their firm hold liability should the strategies fail] and ensure that thorough due diligence is done before investing your money. Furthermore, as you analyse the information you’re receiving, critically assess who benefits from this information being displayed, who is paying for this information to be disclosed and what narrative is being pushed. Using sources like Ground News allows you to know the political and ideological of every news site. Most importantly in the famous words of Warren Buffett; “Be fearful when others are greedy and greedy when others are fearful”

GEN-Z WORD OF THE DAY

Tea

Another word for Gossip or News. It also, in terms of referring to one’s physical appearance, means beautiful/sexy.