Stay Calm

Photo Credit: Moyan Brenn || Relax, you know less than you think...

Photo Credit: Moyan Brenn || Relax, you know less than you think…

So, the Republicans swamped the Democrats in the midterm elections.

Big deal.

The differences between the varying wings of the Purple Party are smaller than you think.  What’s more, their willingness to magnify those differences and do little as a result is a high probability outcome.

Add in that the Republicans don’t have a coherent set of policies as a group. Will the t-party and Establishment wings of the GOP come to a meeting of the minds? (Democrats may insert easy cheap joke here.)  Even if they do, who will take the blame when Obama vetoes their bills?  They aren’t called the “stupid party” for nothing.  They have a peculiar knack for snatching defeat from the jaws of victory, and letting their less presentable members define them.

Even if in theory, the markets do better from Republicans, in practice the reverse seems to be true.  But the track record has so few data points that statistical credibility is low.

And, if there is something to the Republicans being in power moving the markets, how would you know if it wasn’t anticipated in the recent run-up of prices?  Many parties may have bought into the concept of greater prosperity as result of the then-forthcoming elections.  The time to buy the rumor is gone.  The time to sell the news may be here.

The same applies to the presidential cycle.  Many argue that we are heading into a good time for the markets in the third and fourth year of a presidential term.  Too many are arguing this in my opinion, and even if there is some real impact from presidential terms, perhaps the market is anticipating this as well.  After all, the bad part of the presidential cycle looked pretty good this time around.

Add in that again we are working with the law of small numbers — the presidential cycle could just be due to randomness.  Some part of the presidential cycle had to look better.  Is it so much better than any other subset could have been?

The same thing applies to the argument I am seeing trotted around that we are coming into the best six months of the year.  Cue the comments on the law of small numbers and randomness.  Even if there is a structural reason like tax-based selling, might it have been anticipated this time around?  Markets tend to anticipate.  Some six month period had to be best… but is it due to randomness?

Going back to politics, I would point out that few significant things change in politics off of party affiliation.  How many states have their budgets balanced on an accrual basis, taking into account the need to spread out the cost of infrastructure projects, and pensions funded assuming a realistic 5% earnings assumption on assets, together with fully funded accrual accounts?  None.  All of the states put off paying for the accruals of what should be current expenses.

We’ve talked about entitlement reform, but action never happens, except further expansion, as under Bush, Jr.  Will we see GSE reform, or will Congress continue to use the GSEs for their own ends?  Will there ever be significant cuts in defense?  Will we ever see truly balanced budgets on an accrual basis?

Beyond that, consider the Fed, the Supreme Court, and the bureaucracy generally… they don’t change rapidly, if at all.  Admittedly, the Supreme Court has been more activist over the recent past… so maybe I am wrong there.

And truly, Congress changes only at the edges.  The grand majority of the same faces will be there, only the majority and committee assignments shift.  That may not mean much.

But do we want lots of change?  Individually, many of us do, but if you add us all together, it often nets to something near zero.  Perhaps most of us are happy with that, given the alternative that those of us with the opposite views might impose them on the rest of us.

I leave you with this: don’t make too much out of the election results, the presidential cycle, the “sell in May and go away” phenomenon, etc.  The world is complex, with many people trying to anticipate market reactions.  Untangling them is close to impossible, so stay calm, and pursue the ordinary strategies that you always do.  For me, I will continue my value investing.