How American politics affected investment

1789 Capital is part of a trend that is becoming increasingly important. American politics is influencing investment. There is a gap between the worldviews of Democrats and Republicans. Many Americans want to express their political identity in every way possible. Others see their money as a way to influence business behavior. All of this influences investment decisions. For example, investments in exchange-traded funds (ETFs) that track the portfolios of particular politicians may be small, but other movements are more important. For example, about $13 billion was withdrawn from BlackRock accounts as red states boycotted asset managers that support ESG. A bitter rematch between Donald Trump and Joe Biden is likely to further accelerate this trend.

A forthcoming paper by Elena Piculina of the University of British Columbia and her co-authors finds that the portfolios of individual Democratic and Republican investors began to diverge midway through President Barack Obama's term, and have steadily expanded since then. continued. By combining data from investment advisers and county-level election results, the researchers found that investors in Republican-leaning counties avoided stocks in companies whose chief executive donated to Democrats, while investors in Democratic-leaning counties indicated that they were less likely to invest. If there are concerns about the treatment of employees within the company. Voters also indirectly influence decisions made by political representatives, as seen in the ESG boycott.

What is the motive for this action? One possibility is that Democrats and Republicans simply don't see eye to eye on the direction of the economy and, as a result, disagree about which investments will be most effective. It is possible that this has not been done. According to this interpretation, this division is less the result of investors trying to achieve political outcomes than the product of politically distorted worldviews. In fact, a paper by Maarten Mewis of Washington University in St. Louis and colleagues found that American investors' risk appetite changes depending on who is in the White House. After the 2016 presidential election, some Democratic-leaning investors sold stocks and bought bonds, a sign that they were concerned about the future. Republicans did the opposite. Relatively few people made such moves, but typically those who made such moves moved more than a quarter of his holdings.

The authors argue that this reflects differences in the interpretation of economic data. Ultimately, this reflects the rift between Democrats and Republicans on consumer confidence. Both parties have more confidence in the economy and keeping inflation and unemployment in check when the president is from their own party. A consumer sentiment survey conducted by the University of Michigan found that political differences were more significant than differences in age or income. During Biden's tenure, Republicans expected inflation to be 2.4 percentage points higher on average over the next year than Democrats.

However, differences in worldviews do not completely explain this trend. Partisans also seem to be buying stocks as a show of support, just as they put up posters of candidates. Trump's social media holding company Truth Social went public on the Nasdaq in March and soared as his supporters rushed to buy the stock. After Trump's victory in 2016, investors in Democratic-leaning counties increased their investments in clean energy companies, even though the outcome was likely to be bad news for clean energy companies. For these investors, profit is more important than identifying the cause, said Steven Siegel of the University of Washington, one of Picrina's co-authors.

Partisan investors also want corporate behavior to change. Since red states began pulling money out of BlackRock, the company's boss, Larry Fink, has avoided mentioning ESGs. So do other prominent asset managers and bankers. Meanwhile, a study by Matthew Kahn and colleagues at the University of Southern California found that when U.S. state pension funds become more Democratic, such as when a new governor is installed, the companies they invest in reduce their carbon emissions faster. There was found. .

Partisan investing is both a problem and an opportunity for financiers. The rise of ESG investing initially allowed asset managers to differentiate themselves from their competitors. About $120 billion flowed into these funds in 2021, but the final quarter of 2023 saw net outflows for the first time. The challenge now is to pitch without inconveniencing both sides, a task that is becoming increasingly difficult as new topics enter the fray. In October, Florida Governor Ron DeSantis gave financial data firm Morningstar Sustainalytics a 90-day grace period to “clarify its business practices or cease boycotting Israel.” Ta. He argued that the company's ESG metrics classify the company as an investment risk. An independent report commissioned by Morningstar recommended that certain tags be removed for companies operating in “occupied territories,” a recommendation the company intends to follow. Florida State subsequently removed Morningstar from its watch list.

Conservatives aren't the only ones making noise. Asset management firm Vanguard has been targeted by activists for withdrawing from the Net Zero Asset Managers Initiative, an industry group. In January, the Sunrise Project campaign group began running ads in Pennsylvania, the company's home state, accusing the company of giving in to bullying.

At the same time, small businesses can be more partisan. Funds that apply a liberal perspective to investment decisions have long existed, such as Parnassus Investments, founded in 1984. These funds are being joined by right-wing funds. In addition to 1789 Capital, there is also Strive Asset Management, founded in 2022 by former Republican presidential candidate Vivek Ramaswamy, which has invested in a U.S. energy ETF with the fossil fuel-focused ticker DRLL. providing.

Taking a stand can be costly. Anti-ESG boycotts increased borrowing costs for Texas municipalities by $300 million to $500 million, as banks with ESG policies pulled back from underwriting the bonds, researchers at the Federal Reserve and the University of Pennsylvania found. Democrats who shifted away from stocks when Trump won in 2016 would have lost their post-election rallies. The year after the vote, the S&P 500 rose 21%.

Markets thrive on disagreement. Every seller needs a buyer and every buyer needs a seller. Funds that offer investors the opportunity to express these opinions aren't necessarily a bad thing. But American capitalism is built on the pursuit of profit at all costs. In recent decades, investors have flocked to index funds that track the market and offer diversification and low fees. To the extent that partisan investors seek to reshape the economy around their values ​​rather than betting on what they believe about the economy, they will pay the price.