- Wednesday, October 16, 2024
Investors should brace themselves for the possibility of Donald Trump being elected president in November. The anger among the electorate, which played a significant role in his 2016 victory, has only intensified since his narrow loss to Joe Biden in 2020.
While Trump's legal troubles following his departure from office may pose a threat to his candidacy, the implications for bullish investors are relatively insignificant compared to the risks associated with a Biden win. However, if Trump were to lose, the reaction of his staunch political base could be so extreme that it could potentially push down stock prices.
Contrary to the concerns expressed during Trump's initial presidential campaign, many investors now understand and appreciate his pro-business stance. The market's recent exceptional performance has led some to speculate that part of this strength might be attributed to investor anticipation of Trump's return. In fact, the S&P 500 index is currently trading at record levels.
It is important to recognize that at least half of the American population will vehemently reject any positive portrayal of Trump. Conversely, the other half, if not more, will support any candidate who shares their belief that the United States, being the greatest nation in history, is currently governed by a political class more infatuated with their own voices than anything else.
These divisive issues, often the subject of heated discussions among friends and family, have yet to be fully factored into the market narrative. If investors anticipate a pro-market approach from the next administration, it could further solidify recent stock market gains and provide a robust foundation for further growth.
The key challenge lies in separating emotions from politics and treating Trump's candidacy as a straightforward binary trade. This approach proved successful during the 2007-2009 financial crisis when many companies were perceived to have equal chances of survival or collapse. Investors who confidently bet on the strength of America were handsomely rewarded.
Should Trump secure re-election, the stock market is expected to experience a surge in response to his perceived favorable policies. To test this hypothesis, it will be crucial to monitor how stocks react to news that clarifies Trump's eligibility to remain on the ballot.
The Tumultuous Landscape of the November Election
If there is one thing that can be said about President Trump, it is that he will not graciously wish President-elect Biden well if he loses the election. The events of January 6th might pale in comparison to what could unfold in the aftermath. The derivatives market is already rife with anticipation, as futures contracts tied to the Cboe Volatility Index (VIX) reveal an unusual level of volatility. The shape of the VIX curve indicates a sense of drama surrounding the election.
Investors are hopeful for the future despite inflation rates declining. However, complications arise due to the current state of the VIX curve. In order to strategically position oneself for a potential market rally in the case of a Trump victory, or a violent reaction following his defeat, consider employing a "strangle strategy" using the S&P 500 exchange-traded fund (ETF). This trade can yield winnings if the stock market experiences significant movements in either direction.
To execute this strategy, purchase both the December $520 call option and the December $470 put option when the ETF is valued at $491. If the ETF reaches $550 at expiration, the call option is worth $30. Conversely, if it drops to $440, the put option becomes worth $30.
The reasoning behind this trade reflects a concern that various forces, such as social media platforms, foreign government propagandists, and even certain mainstream media outlets, will attempt to manipulate the American electorate. The prevalent emotional turmoil in our society makes it challenging for individuals to adopt long-term thinking since they are continuously bombarded with anger-inducing and anxiety-provoking information about their futures.
This stressed emotional state is heightened by significant shifts in demographics, particularly as an increasing number of people become reliant on rising stock prices for their financial stability. With approximately 10,000 citizens turning 65 every day, retirement is not financially feasible for many.
In the realm of politics, personal economic well-being often takes precedence over all else. This fact alone could draw voters to Trump, despite reservations about his behavior being largely repugnant.
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