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Analyzing Key Features of Policy Trends

06.26.2018 | Ben Phillips, CFA

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Policy trends occur when changing rules and regulations alter industry dynamics, company business models, and global trade.

 

The resulting impacts from policy can be positive, negative, or a mixture of both. They can last days, months, or years. The common theme is the fundamental disruption of a company. For example, some past long-term policy trends include: (1) Dodd-Frank, (2) the Affordable Care Act, and (3) Bush defense spending in the early 2000s.

 

“Policy investing has three key features: its status as a (1) leading indicator with a (2) long-term horizon that is (3) historically uncorrelated to broader markets.”

 

Policy investing has three key features: its status as a (1) leading indicator with a (2) long-term horizon that is (3) historically uncorrelated to broader markets.

 

We view policy as a leading indicator with long-term implications because it forces businesses to pivot. Company leadership teams must adapt to survive or risk falling behind. The resulting changes can impact operations and cause investors to revalue companies.

 

It’s important to note that policymaking tends to occur independently of economic cycles. This is because Congress typically debates and passes legislation without considering the level of inflation and interest rates, job and payroll data, or foreign currency movement.

 

The government can’t pause policymaking just because of a recession. In fact, policymaking may be more important during an economic downturn as the government attempts to implement reforms via new policies and regulations.

 

Once enacted, policy tends to unfold over multiple years as government agencies refine laws by issuing interpretive guidance. This creates a long-tail effect, during which investors may continue to reprice a stock as the policy is refined. For example, the Affordable Care Act was passed in 2010, with Medicaid and Medicare expansion in the following years. However, the policy reversed course six years later when Donald Trump ended government subsidy payments and 2017 tax reform repealed the individual mandate tax penalty. It’s because of such variations that we believe policy plays out over a long-term horizon and is uncorrelated to the broader markets.
 

 

This is an excerpt from our White Paper: 

A Guide to Policy Investing

 

Download Full Whitepaper

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Important Information

Active Weighting Advisors LLC ("AWA") is an SEC-registered investment adviser that manages ETFs under the brand name EventShares Funds. Mr. Phillips is the Chief Investment Officer of AWA. The views expressed are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. AWA is not soliciting any action based on this document. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Investing involves risk, including the possible loss of principal and fluctuation of value. Mr. Phillips and AWA disclaim responsibility for updating information. In addition, Mr. Phillips and AWA disclaim responsibility for third-party content, including information accessed through hyperlinks. For more information about EventShares, contact us by calling 877.539.1510 or visit our website at www.EventShares.com.