Election Year Dangers for Income Investors

04/05/2012 9:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

The conventional wisdom is that presidential election years are good for investors, since politicians do whatever they can to boost the economy and markets headed toward November, but that isn't the case with some important sectors, writes Roger Conrad of Utility Forecaster.

March 2009 marked an historic bottom for the stock market. The three years since have been among the most explosive on record for investors. It’s been particularly exciting for those who’ve owned dividend-paying stocks, which have surged across the board.

Unfortunately, many investors were left out of what’s been one of the greatest bull markets in history for one reason: They let their political views and fears get in the way of reason and time-tested principles of successful investing.

For some, it was the hundreds of billions spent by the federal government to stimulate growth and the deficits left behind. For others, it was the growing reach of the federal government into heretofore unclaimed areas, such as health-care reform and bailing out the banks and automobile industry. And for others it was the Federal Reserve’s dramatic expansion of its balance sheet and policies to prevent deflation, which for them made hyperinflation all but inevitable.

Whatever the case, they left the stock market for cash, bonds, annuities, and other investments they concluded were safer. And the result is they locked in their 2008 losses while eliminating the potential for recovery.

Some of these investors are still in a fortress mentality and out of the market. Others, however, have relented and come back to stocks, for at least a portion of their portfolios. Their success has depended on when they did come back and their staying power in what have been quite volatile markets. But they’ve almost always been far better off than those who stayed out completely.

Ironically, three years of upside hasn’t stopped many investors from continuing to let their politics—in this case anti-Obama administration feelings—govern their investment decisions. And many readers continue to ask if they shouldn’t just abandon stocks altogether, to avoid the possibility of what might happen if the president is re-elected.

Fears generally center on speculation about sharply higher taxes, well beyond anything the administration has actually proposed. But they include a score of other supposedly hidden agendas, such as policies to intentionally trigger hyperinflation and confiscation of gold held by individuals.

My job is to pick dividend-paying stocks backed by strong and growing underlying businesses. Obviously, any of these measures, if enacted, would have a profound impact on investment returns.

On the other hand, it’s ludicrous to base your investment strategy on them.

First, the source of most if not all of these charges/rumors is the opposition party and its proponents, which has a vested interest in scaring as many people as possible to get out the vote in November.

Second, getting anything done in Washington next year is going to require compromise. No one party is going to control the House of Representatives, the White House, and 60 US Senate seats, least of all the president’s party.

Yes, a re-elected president is often in good shape to pass his top priorities. But as President George W. Bush found out in 2005 with Social Security reform, political capital runs out quickly, more so when the goals are ambitious.

The president has been largely stymied the past two years. Even if you’re willing to accept him as deceptive and bent on the destruction of the country, he’s going to be stymied again if he wins this year, unless he does a lot of compromising.

Finally, even if the president is re-elected, is a deceiver, and is able to pass what he wants, this isn’t something investors can control. What we have is a choice. We can either bail out of the markets on the speculation the worst will occur, or we can continue to do what we can control—that is try to buy good, dividend-paying stocks at good prices.

Following the first course of action was a true disaster back in early 2009, even when the president had a Democratic majority in the House and a supermajority of 60 in the US Senate. Is there any reason whatsoever—beyond political partisanship—to expect it will work any better this time around?

There is a case to be made for watching political events as they affect the stocks you own. That’s what I do in Utility Forecaster, as I analyze the impact of regulation on energy and communications companies.

One area is the environment, where the Environmental Protection Agency (EPA) has issued first-ever rules on carbon dioxide emissions.

Relative to carbon taxes in Australia and throughout Europe, the measures are fairly benign and allow companies time to react to rules. But they will raise costs for some—particularly coal-burning power generators that operate in wholesale markets—even as they help others by increasing demand for natural gas in particular to generate electricity.

Federal Communications Commission (FCC) policies that attempt to slow the drive to market dominance by AT&T (T) and Verizon Communications (VZ) continue to be wholly ineffective on that score.

But its rejection of AT&T’s takeover of T-Mobile USA was a full-fledged disaster for Deutsche Telekom AG (Germany: DTE), which was effectively prohibited from selling its US operation at a decent price. And it cast a chill on any foreign investment in US telecommunications in general by raising doubts that buyers can exit.

These are the key political and regulatory issues for investors to focus on. They have real world consequences in the here and now.

The rest is a waste of time, at best. At worst, it’s a formula for emotional investing and inevitable disaster.

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