Technical Analysis vs. The Fundamentals
Posted on October 21, 2014
When I worked at the Chicago Board of Trade (a long, long time ago), I met a guy who traded stocks, bonds and commodities, and based his investment decisions by meticulously charting daily and hourly movements of the prices fluctuations.
From his charts he believed he could predict what would happen to the stock (or commodities) in the future.
This is known as technical analysis.
Warren Buffett, the Oracle from Omaha, has a different approach.
He doesn’t look at the charts of price fluctuation. He looks at the balance sheets and the prospectus of each company. He likes to buy stocks of companies that he has heard of before. He wants to know the products they produce and wants to understand their plan to make a profit.
This is known as fundamental analysis.
When it comes to political races, we have a similar breakdown.
The technical analysis comes with folks who chart the polls.
Real Clear Politics publishes every poll known to man and then averages them to give readers a sense of where the voters are in each individual race.
There are plenty of eggheads that have made a living analyzing the polls in minute detail to predict how elections are going to break.
Nate Silver, who used to do this for the New York Times, now has his own outfit. Sam Wang is another technical analyst.
I tend to believe in fundamentals in elections.
My biggest fundamental, in a midterm election especially, is the job performance of the President.
If a President has governed well, achieved solid accomplishments, presided over solid economic growth, and has the approval of more than half the country, his party should hold its own.
If a majority of the country disapproves of the President, then it is tough sledding for the party in power.
The second fundamental I look at is the quality of the candidates.
If you have a good candidate pitted against a bad candidate, the good candidate will usually win.
That’s not always the case, but it usually is.
The third fundamental I look at is the state of the state where the campaign is being run.
If voters dislike where their state is going, it can either act as a hedge against the President’s party if a different party is in control of the state, or it can accelerate the decline of the candidate from the President’s party.
If voters are generally satisfied with local governance but strongly dislike the President, it hurts the folks in the President’s party but usually helps those from the other party
In my view, fundamentals overwhelm campaigns in most cases. In close elections, of course, campaigns can and do matter. But if the fundamentals are against you, you usually can’t win and if they are for you, you usually can’t lose.
No matter what the technical analysts may say, the fundamentals point to a Republican sweep in two weeks.
Barring any more late minute October surprise, the President’s disapproval ratings will drag down most incumbent Democrats who face tough elections. In a few cases, some Republicans might stumble on their way to the finish line, but that is because their own fundamentals have overwhelmed the national mood.
But I still think that Roberts, Rounds and Perdue pull it off in the end.
That’s my prediction and I am sticking to it.