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With Election Day less than a month away, now is an appropriate time to bust some myths regarding the intersection of politics and investing.
Many of those myths exist at the sector level, something I addressed last month using the energy sector as the example. Of the 11 global industry classification standard (GICS) sectors, energy is merely the ninth-largest or third-smallest in the S&P 500, but it’s arguably the most relevant when it comes to politically driven sector mythology.
As advisors know, many investors, including professionals, believe that Republican presidential administrations are better for fossil fuel stocks and Democrat presidents are the opposite. Examining the way in which the oil and gas industry donates to the political parties, it’s clear it concurs. Yet, the reality is different. As I pointed out last month, the S&P Energy Select Sector Index performed quite well during President Obama’s eight years in office, not so much under President Trump and has regained its bullish ways under President Biden.
Looked at another way, investors and perhaps the industry itself conflate the favorable regulatory regime proposed by Trump and Republicans as a recipe for higher energy equity prices, but that doesn’t always pan out.
Others Picking Up on the Theme
John Rekenthaler, vice president of research at Morningstar, explored the aforementioned political “surprise” pertaining to the energy sector, mentioning an obvious though important point: if oil companies pump more, which they presumably would if regulations allow for it, prices decline and so do their earnings.
“Opening the regulatory gates might harm the earnings of energy companies in the short term,” observes Rekenthaler. “However, with Biden aiming to have 50% of all new US vehicle sales be electric by 2030, and Kamala Harris pledging four years ago to require automakers to build only electric or hydrogen vehicles by 2035, the alternative is clearly worse. Better pain today than the threat of extinction tomorrow.”
He highlighted another relevant consideration that underscores the risks of betting on or against energy stocks based on presidential election results. Yes, the U.S. is the world’s largest economy and massive consumer and producer of petroleum, but eight of every 10 barrels of oil are pumped outside this country meaning no U.S. president or Congress can exert much influence on global oil prices.
Plus, political speak is, well, often not truthful. On the 2020 campaign trail, Biden pledged to end fossil fuels, but since he took office, domestic oil output has surged to record highs. That could be to the chagrin of the clean energy crowd.
Speaking of Clean Energy…
I also pointed out last month, using the S&P Global Clean Energy Index as the gauge, that clean energy stocks soared during Trump’s time in office while disappointing in significant fashion under both Obama and Biden.
Rekenthaler made a similar point with a nifty hero/villain comparison. He used the Nasdaq US Clean Edge Green Energy Index as the measuring stick, but the outcome is the same.
“Except, of course, the roles of hero and villain were reversed. Despite Trump’s ongoing war against wind turbines, as well as his skepticism about electric automobiles, clean energy stocks crushed the stock market averages when he held office. Meanwhile, they have struggled mightily under Biden’s administration,” he concluded.
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