Have you ever heard news about a company and noticed that the stock price did not move? Perhaps it moved in a direction you were not expecting. This happens more often than you would think in the stock market. In this article, we will focus on how politics affected company stock performance in recent history. We will take a look at a few major events in politics where investors expected stocks to move a certain direction but failed to do so. Good examples would be budget sequestration, the Affordable Care Act, and the sweeping changes in marijuana legalization. All of these were expected to change industries for better or worse. In each of these you could have formulated a trading strategy based on popular opinion and would have been wrong.
Major Political Events and Company Stock Performance
The “fiscal cliff” served as a harbinger of the major legislative showdown of 2013. This led to a government shutdown and budget sequestration. A culmination of expiring tax cuts and spending cuts spelled disaster as legislators, on both sides, were unwilling to compromise on their favored cut or spending expansion. At this time, the Iraq War was declared to be over. It was all too tempting to reduce military spending in favor of other government programs. Stocks involved in military spending were expected to be under heavy pressure. Companies like Lockheed Martin, Boeing, and Northrop Grumman source a great deal of revenues from the government. You would have expected the stock prices to have been impacted. The political news flow did not negatively impact the stock price. In fact, they thrived. A combination of sufficiently diversified businesses and furloughing employees helped increase profitably despite declined sales.
The enactment of the Affordable Care Act brought about major regulatory changes on who and how insurers provide coverage. One notable change is the requirement for insurers to cover preexisting medical conditions. Not being able to consider preexisting conditions was anticipated to increase the cost for insurance companies. Along with preexisting conditions, there was a variety of other regulatory changes that would be expensive to implement and maintain compliance. Companies like Humana, Aetna, and UnitedHealth Group were speculated to be less profitable going forward. Though the individual exchanges did indeed prove to be less profitable, the companies eventually exited them to focus on more profitable business lines and continued to grow.
Legalization of Marijuana
An example that serves as a contrast would be the legalization of marijuana sweeping across the United States. Forecasts of the legal marijuana market size vary widely. It can be said, however, that there exists a large untapped market in its legal form. The stocks involved in the marijuana industry boomed. There was an expectation that these companies would quickly turn profitable and benefit as the founders of the industry. Reminiscent of the dot-com bubble, companies with low-to-no revenue were gaining unreasonably high valuations. The irony of this example is that as more states legalized marijuana, the stocks began to fall as profitably failed to materialize.
In Sum, Companies are not Static
These are all good examples where politics could have easily led to a reaction to sell or buy. In a static world, the reasoning to sell or buy is sometimes as clear as day. Instead, these stocks moved in a completely different direction than what was expected. Although you should not ignore news, you should recognize that companies are highly adaptive to the legislation and politics of their industries. Companies are not static, but are dynamic organizations that will continue to seek profitability. Popular opinion does not always translate to great investment ideas.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
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