An Election Warning For Energy Traders

I have said and written many times, in many different contexts, that one of my core investing beliefs is that politicians have a lot less effect on the market than most people, and especially they themselves, think they do. The one major exception to that, at least when it comes to Presidents, is in terms of energy stocks. The Department of Energy is run by the White House, as is the Environmental Protection Agency, which is responsible for a lot of the regulations that directly impact the energy industry. Obviously then, who is President matters for energy companies to some extent.

The relationship, though, isn’t as simple as it often might seem at first.

When Donald Trump was elected in 2016, it was generally seen as being a great thing for both oil and coal. He had embraced the two “dirty” energy sources during his campaign and had promised to do everything he could to help them. He would be the friend of fossil fuels. If you look at the charts for crude prices (CL: top) and the Coal ETF (KOL: Bottom) for the four years since his election, though, you would probably be tempted to as “with friends like that, who needs enemies?”

The thing is, no matter how much energy policy changes and in which direction, there are long-term forces at play that will always supersede those changes. Over four years, in both cases, those long-term forces eventually won out. Still, for the first year or two following the last election, long crude and long coal were pretty good positions to hold.

That has led many people to look at the polls for this election, see Biden with a double-digit lead over Trump and buy alternative energy stocks.

First Solar (FSLR), for example, is up over 180% from its lows in March, and Jinko Solar, with the added bonus of a possible Biden-led thawing of trade relations with China, has done even better. There the chart for the last couple of months looks like this…

That’s an increase of over 200% in 2 months!

There are, however, several reasons to believe that trying to follow that trend now would be a big mistake.

When Trump won in 2016, it was a surprise to a lot of people. He had been behind in the polls for a while, albeit by just a couple of points, and the assumption was that that would translate to a Clinton win. So, once it was clear that Trump won, there was a massive adjustment in the market. Then too, solar and other green energy stocks had ben bought in front of the election and big oil had lagged. That turned around quickly, starting November 5th.

I am not saying that is going to repeat. The conditions now are completely different. The pollsters have learned from their mistakes last time and an 8 to a 12-point lead in polling averages is a very different thing from a 2 to a 4-point lead, especially when you also have a big lead in almost all swing states.

The point is though, that precisely because of that, buying solar stocks and selling big oil right now would be a mistake. It has been thought for a while that a Trump win is unlikely, so a Biden win is already priced into that trade.

There are two problems with that. The first is that “unlikely” and “impossible” are two different things. Trump could yet pull it out of the hat again, and even if Biden does win, it could be a close enough result that there will be some post-election chaos. In that environment, everything will fall, with those that have shown recent strength leading the way.

The second is that when something is foreseeable, the usual pattern is to “buy the rumor, sell the fact”. Those that buy in anticipation of something tend to sell when it happens, so, very often, the thing that is supposed to be good for a stock or commodity ends up being the trigger for it to lose ground. When all the good news is priced in there is really only one way to go once that news is confirmed…

If you bought solar stocks when I pointed out that they would benefit from a Biden lead back in December of last year, you would have done well, and if you did so at the lows in March, even better. If so, congratulations! If not, though, this is not a bandwagon that you should be jumping on at this point. All the short-term risk now is to the downside and, as we have seen over the last four years, the long-term impact of White House policy, even on energy, is limited.