Although investors may be tempted to invest based on who they think will win the election and how certain policies may be implemented, macro forces often dwarf policy agendas when it comes to sector performance.
Investors often consider how they should be tweaking portfolios in an election year to position more defensively for volatility or more opportunistically for potentially rallies in certain sectors based on policy expectations. As highlighted in a prior post, it is very difficult to construct reliable sector strategies based on different political outcomes, even if a party is relatively consistent over time on policies they seek to implement in different industries. Moreover, just because an administration wants to implement a specific policy, doesn’t mean they will be able to, or that the intended effect will play out accordingly in the economy or markets.
For example, the Biden administration campaigned on scaling back fossil fuels and galvanizing renewables. Once in office, the administration passed the largest ever U.S. government commitment to climate of $369 billion through the Inflation Reduction Act of 2022. Given this, one would have expected traditional energy stocks would be punished, while renewables would be catapulted. Instead, the exact opposite has happened. From President Biden’s inauguration date through the end of 2023, the S&P 500 Energy index nearly doubled, while the S&P 500 Global Clean Energy index was down -50%. On the other hand, President Trump campaigned vigorously to support the traditional energy industry and approve leases for drilling during his presidency. However, during his presidency the S&P 500 Energy index was down -40%, while the S&P 500 Global Clean Energy index was up 275% from his inauguration through election day 2020.
How did two presidencies with opposing views on energy policy result in the exact opposite effect in the stock market during both administrations? The surge in clean energy stocks during the Trump administration was likely related to the enthusiasm around innovation in clean energy, ultra-low interest rates used to finance that innovation, and the rise of ESG investing. In addition, the pandemic shocked oil prices, which fell to $11.57 in April 2020. Oil prices recovered as the economy began to heal, but oil prices were flat during the Trump presidency, limiting gains in the energy sector.
The surge in traditional energy stocks during the Biden administration was more a result of macro forces than policy actions. Oil prices continued to steadily rebound throughout 2021 as the economy recovered after the pandemic. Then, the outbreak of war between Russia and Ukraine caused oil prices to spike 33% in under two weeks. Although oil prices essentially ended 2022 where they started, higher prices on average resulted in a 59% price return for the energy sector due to higher profits. Still, performance was not wholly unrelated to policy, which had unintended consequences. Uncertainty around the future of fossil fuels had some energy companies cautiously approaching future investment and scaling back operations. Tighter supply dynamics supported oil prices, aiding energy company profitability and stock prices. On the other hand, more protectionist global clean energy policies, combined with higher inflation and input costs, have limited growth in renewables, staunching the impressive rally.
Although investors may be tempted to invest based on who they think will win the election and how certain policies may be implemented, macro forces often dwarf policy agendas when it comes to sector performance. Therefore, investors ought to focus on fundamentals and the macro backdrop when considering sector bets.