It has barely been a month since the Tax Cuts and Jobs Act of 2017 passed. Despite a volley of criticism over the bill, Mr. Market has voted with his feet. The U.S. equity rally since then has been substantial — so much so that many market observers seem fixated on negative issues such as valuation, the speed of the run-up, and why a bad ending is inevitable.
This smells to me like one of the most expensive errors investors can make: allowing partisan political views to creep into investment decisions. Experience teaches us that emotions — and these play a large role in shaping our political views — are not your friends when it comes to putting money to work in capital markets.
Market historians can point to multiple examples of this during the past few decades. Some of the most egregious investing errors began with a partisan (and therefore emotional) underpinning. Consider these four historical scenarios, and how they affected some investors at the time:
- A president is impeached for having an affair with a White House intern.
- A substantial tax cut would “blow out the deficit, won’t create jobs, was a wealth transfer from the poor to the rich, would be the first time taxes were cut during a war.”
- A newly elected president who was a “Muslim/Kenyan/socialist; was going to kill the Dow.”
- Another newly elected president who wasn’t expected to win was seen as possibly fatal for the bull market.
Each of those events involved a different president. That each was lamented by members of the opposing political party should come as no surprise. Each was followed by a substantial market rally, which in at least three cases lasted years (the long-run verdict on the last one is still pending.)
What is somewhat surprising — but perhaps shouldn’t be — is that professional money managers who identify with a specific political party allow their views to affect how they did their jobs.
I suspect this is occurring today.
Regardless of whether you like President Donald Trump, or what is happening to the Republican Party, or whatever you may think philosophically about the new tax cuts, none of it serves as a basis for establishing an investment strategy. You may believe the cuts are a reckless, ill-timed, deficit-expanding wealth transfer to the rich; indeed, you can hate the impact of this sort of partisan policymaking approach and its long-term implications for the nation’s fiscal health. But if you manage other people’s money for a living, you should sequester your personal views, and recognize the impact of $1.5 trillion in deficit spending will have on jobs, the economy and perhaps most of all stocks.