Recent political events worldwide have shown just how far and fast markets can move when politicians and politics interferes. Announcements, elections, referendums and executive decisions can move markets faster than a dodgy dossier.
It used to be said that a fortnight (two weeks) was a long time in politics (radical UK Liberal politician Joseph Chamberlain is credited with having said this in 1896). By the early 1960s it was down to a week (future two times UK prime minister Harold Wilson is credited with having said a week is a long time in politics in 1964).
In today's 24/7/365 news world a week would seem like an epoch. US president Donald Trump's fondness for outrageous provocative messages via Twitter have slashed the concept of a long time in politics to a matter of seconds.
The tendency to look to markets of all kinds to gauge the impact of political events, pronouncements, bluster and outright threats has been amplified as a result. Television presenters, news reporters, commentators and other analysts are forever asking for, and delivering, instant reaction in a manner that is beyond parody.
The list of market impact events is long, and evolves and grows second by second. Recent highlights include
- North Korean missile tests, dotard insults and threats to shoot down US planes
- President Trump's rocket man threats
- The imposition of US tariffs on Canada's Bombardier to protect Boeing
- Election success for right wing extremists in Germany
- Election failure for right wing extremists in the UK
- Unexpected and unnecessary elections in the UK and Japan
- The tightening of monetary policy
- The loosening of monetary policy
- Independence votes in Scotland, Spain and Kurdistan
- The Brexit referendum leading to the UK leaving the EU
- The withdrawal of the London operating licence from car hire colossus Uber
- Announcements made at political party conferences
- Confusion on the direction of the price of oil following pronouncements in Turkey about the possible outcome of the Kurdish referendum halting oil exports from Kurdistan: is US$45-$55 the new normal or will it drift back up towards $100?
Each event a warning
Each event provides a warning of how quickly things can change adversely for the short-term investor. All the above - and more (the list could go and on) - have hit, are hitting, or will hit in future the price of
- Equities (private and public)
- Real estate
- Other alternative assets
- Cryptocurrencies such as Bitcoin
- One thing is certain
In the end, though, one thing is certain. All other things being equal, fundamentals will eventually triumph. The only investor issue is whether individual traders can keep their heads above water until that happens.
As the near legendary economist John Maynard Keynes is almost universally thought to have said: Markets can remain irrational longer than you can remain solvent.
What in the way of advice might be offered to investors looking to take advantage of profit opportunities arising from political goings-on? Or to protect themselves from possible losses that might be induced by them?
No turning back time
In the absence of a functioning two-way time machine, it is difficult, arguably impossible, to arrive at a definitive answer. For while it is clear that politicians have vast power to affect markets of all kinds, until decisions and pronouncements are made one trader's guess is as good as another's.
Buy the rumour, sell the fact is about as scientific and technical a piece of advice as is widely available.
Sometimes the impact will be positive, and will boost market prices and confidence. At other times, the impact will be negative and market prices and confidence will suffer accordingly. Maybe well beyond the event in question.
Both can be right simultaneously as in the algorithm-driven 21st century one black box's positive will be another black box's negative. Both will seek to transform any given situation into a profit opportunity.
Invest for the long term might be one modest suggestion. Study fundamentals. Develop an understanding of markets that becomes intuitive. Take a strategic buy-and-hold view of investment rather than an opportunistic trading-driven view.
But be prepared to swoop if an unexpected opportunity suddenly presents itself.
In short, invest like Warren Buffet, the sage of Omaha. Invest in assets you like and understand. Invest in assets where the long-term fundamentals are (a) clearly identifiable (b) have longevity and (c) trump the short-term politicals.
UK political predictions
A quite different alternative exists for investors with assets of any note in the UK who believe that there is a snowball in hell's chance that the Labour party will move from the threshold of power back into office.
Sell everything might well be the best advice on offer here, starting with the pound itself. The announcements made at this week's Labour party conference in Brighton commit the party to renationalise a swathe of industries and businesses.
They were accompanied by a declaration from shadow chancellor John McDonnell that he will prepare for a run on the pound. On the one hand, some will admire what is unusual honesty being displayed by a politician.
On the other hand, some might ask if he has been smoking something illicit. The chaos that would be caused by widespread renationalisation would be unprecedented. Except the nationalisation of the banking industry in 2007-08 provides just such a precedent.
For the most part, though, the impact of political posturing and political events on markets and prices will be minimal. A sudden political change can affect trading conditions, maybe dramatically, but markets have long demonstrated an ability to adjust, and adjust rapidly.
The past few days have seen markets shrug off political matters. The euro and the DAX barely moved even as the results of the German elections became clear. The return of extreme right-wingers to the Reichstag barely registered.
Yes, in Spain the IBEX35 did fall on 26 September as relations between Castille and Catalonia deteriorated. But the fall was 0.3%. Repeat, 0.3%. And repeat again, 0.3%.
In anyone's language - other than that of an algo-driven black box or a supermarket sector research analyst scrutinising net margins - such a small movement scarcely amounts to a rounding error. And short-term movements rarely set long-term precedents.
Buy, sell, trade
Short-term reactions to politics can be expensive for the day trader who didn’t see it coming (and lucrative for the one who did) but should not bother the long-term investor.
Most markets can cope with moves in known knowns. Even moves caused by known unknowns. It is the unknown unknowns that do the greatest damage. In this context, investors should look to make money when they buy an asset, not when they sell it.