The obviously not-so-obvious impact of elections on the markets

Stocks had a mixed close as confused investors buckled down before the weekend, turning their sites on the Aurora Borealis and inflation data, coming up this week. According to the University of Michigan Sentiment survey, consumers are getting anxious about the economy, and they are upping their expectations for inflation – a worst case scenario for the Fed.

Grandstanding investments. I have been getting a lot of questions about the impacts of the upcoming presidential election on the markets. Sorry to inform you that this is an election year… in case you hadn’t noticed 😉. I have been reluctant to commit to anything up until… wait for it… wait for it NOW. It is clear that Republican Presidential Nominee apparent Donald Trump is in election mode, rallying hard every chance he gets. Similarly, President Biden seems to be showing up on lecterns set up at factories more and more. However, up until now it has all been talk.

Over the weekend, you may have seen a headline or two about the Biden Administration quadrupling tariffs on Chines EVs and certain other product classes… BUT NOT SOLAR. Well, my morning jog through all the major news outlets has found multiple amplifications about Biden’s bold move. It does seem rather bold on the surface, doesn’t it? Quadruple! That is a lot, and I am sure that you probably don’t see that word often in the policy pen. Triple is a lot… but quadruple says, “I mean business!”

Why would the administration do this now and what does it mean? Rather, what does it really mean? First of all, how many Chinese Electric Vehicles have you seen on the road recently? Come on, take your time. Ok, I will help you out. Chinese EV manufacturers include BYD, NIO, Xpeng, Geely, Li Auto, Chery, SAIC Motor, and Changan. Keep thinking. What, you haven’t seen an Ora Good Cat, BYD Seal, Zeekr 001, or a Wuling Hongguang Mini? Of course, you haven’t because there are virtually no Chinese EVs sold in the US. So, what effect would a quadruple have on the Chinese EV industry? Probably the same effect as a quintuple one… almost nothing. Are you getting my point yet?

Why would solar equipment be excluded from the supersized tariff? Do I need to answer that question? Ok, I will for good measure. Because 89% of the solar panels in the US were imported from… wait for it… China. Tariffs are great tools for discouraging foreign production from entering the country, but they also come at a huge cost. And that cost is absorbed by none other than the consumer. That’s right, you and me. You don’t expect retailers to absorb the quadrupling of their costs, do you? No. If you want solar panels and the cost of the solar panels goes up by +400%, you better believe that you are going to be paying more for the privilege of ownership. I am sure that the Biden administration wouldn’t want to do anything that would add to already sticky inflation.

Sorry to be so graphic here, but I expect that we will start to see more policy moves designed to have maximum press effect but minimal economic impact as we get into the final months before the election. Now, to be clear, I am not calling out the current administration specifically. This is a normal practice for all administrations in election years. I also read an article this morning that the Administration has promised offshore wind farms if reelected… amongst other things. That got me thinking that you are probably wondering if you should make some investments based on who you expect to win the presidency. Sure, you are, be honest. Let me help you out here.

You are thinking that if Biden wins, that green/clean energy will get a boost, and that brown/dirty energy will get walloped. Do you remember back to the last election when this very policy decision was front and center? Isn’t it well known that Republicans favor fossil fuels and Democrats love clean energy? You don’t have to answer that question, it was hypothetical. I am going to share just one chart with you this morning. Take a look and follow me to the close.

That’s right, since Biden has been in the White House, traditional energy has done really well, while solar and clean energy has languished. So, what’s my point in all this? This is not me being critical of any presidential policy. This is just me saying that we are going to start to see what appears to be election year politics affect the markets, but caveat emptor, you will probably not be able to trade on any of it, because a) most of it is not real, and b) because most of it is… not real. Get my point? Be sharp and focus on what is important. The actual economic numbers, corporate earnings, and interest rates. Those, not quadruple tariffs on products you never heard of, are the issues that should be front and center in your investment theses.

LAST FRIDAY’S MARKETS

NEXT UP

• No economic numbers this morning, but coming up in the week ahead, we have more earnings along with Producer Price Index / PPI, Consumer Price Index / PPI, Retail Sales, Industrial Production, Leading Economic Index, and housing numbers. Download the attached economic and earnings calendars for times and details.
• Today’s Fed Speakers include Cleveland Fed President Loretta Mester and Fed Vice Chair Philip Jefferson.