The Truth About Presidents and Markets By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Two ways markets are pricing in a Trump win…
- Why that would be yet another tailwind for small caps…
- What our income and volatility expert has to say about either outcome…
- Seasonality defied, and what that means…
- Election volatility is a generational buy…
Don’t let politics blind you… Look, we all have opinions about politics. It’s natural and human. Problem is, we’re in a time where the mainstream media enragement machine is desperately trying to drag all those usually private opinions to the surface. The more you focus on them, the prone you are to clouded judgement and irrational decisions. Don’t fall for it. If you let politics influence your investing, you’re going to have a bad time. You’re ahead of most investors because you read TradeSmith Daily. We deal in facts, proof, and evidence here and leave the mushy emotional stuff at the door. Here’s the fact of the day: Markets are pricing in a Trump victory. Like it or not, odds are strong that a week and a day from now you’ll wake up to the news that Donald Trump will be president again. We can see that with data from one of the biggest betting markets on the internet, Polymarket. Here’s the current standing for the next U.S. president: 
The Trump line is going up, and the Harris line is going down. This is one of the two main ways we have of forecasting the election results, and betting odds is plainly better than polling for one simple reason: There’s money on the line. Responding to a poll with your opinion in the moment costs nothing. Betting on an outcome is obviously quite different, so it reflects greater conviction. (By the way, have you or anyone you know ever been polled? I haven’t. Write me at feedback@TradeSmithDaily.com to let me know whether you have… and if so, when… because I’d love to hear about it.) With this election cycle, we now get one more way to look at Trump’s election odds, though. It’s admittedly less balanced, and it involves his publicly traded company, Trump Media & Technology Group (DJT). Earlier this year when DJT completed its SPAC merger and listed on the Nasdaq, we mentioned it was “something of a meme stock”… but potentially also something worth trading. The reason why is that DJT is much less “social media company” than it is a share of Trump’s personal brand and, in some ways, a super PAC. It’s like the Bowie Bond of this generation. Speaking personally, I don’t tend to speculate on stocks or options all that much. So, DJT is not for me. But we can’t deny the recent momentum and what it indicates about Trump’s odds. Here’s the chart: 
Trump Media & Technology Group now enjoys a $10.3 billion market cap, up about quadruple from those September lows. All this should tell us one thing. Between betting markets and Trump’s own company, investors are clearly willing to put billions on the line that he will win next week. So, we ought to prepare for a Trump victory… One way to do that is to look at what happened when Trump won last time. Here’s a chart of the S&P 500, Dow Jones Industrial Average, Russell 2000, and Nasdaq 100 from back in 2016: 
Two things to point out here: - Stocks slumped in the last days of October and into November. We’re seeing something like that now, though to a lesser extent. The S&P 500 is down half a percent from its high set on Oct. 18. Small caps, though, are off way more: the iShares Russell 2000 ETF (IWM) is down about 3% from the Oct. 16 high.
- Small-caps and industrials surged after Trump’s victory. They outpaced large-caps and tech for the rest of the year and into 2017.
This is an interesting coincidence. My contributing editor Lucas Downey and I have been beating the small-cap drum all year long. Their performance still hasn’t caught up to their large-cap peers, with the Russell 2000 index still below its 2021 highs, but the recent momentum has been palpable. Over the last year, small-caps are up 35%, right behind large-caps at 40%. The reason why all comes down to interest rates. High rates crush small companies, who need to borrow far more to fund growth. Not only are rates slowly coming down, we may soon have a president who’s been very vocal about his intention to directly influence the Fed’s rate campaigns. Whether that’s a good idea or not… again, that’s a political opinion. As investors, we need to simply factor it into our plan. In summary, Trump’s odds look pretty good on multiple fronts. The last time he won the White House, small caps benefitted greatly. And there’s even more tailwinds behind the small-cap sector. That means any under-allocation to smaller companies ought to be rectified in short order. Our income expert, Mike Burnick, has been preparing his readers for either scenario… Every paying TradeSmith subscriber gets access to Mike’s newsletter Inside TradeSmith, which is designed to both highlight some of our best and newest software features and to use them to uncover fresh opportunities. Recently, he shared some fascinating data about how to trade no matter who wins next week. Here’s Mike… starting with a very useful chart: 
The chart above shows how well - or not so well – the various S&P 500 sectors have performed under Republican and Democratic presidents since 1970. For instance, Consumer sectors [Staples (XLP) and Discretionary (XLY)] often perform best under Republicans, often driven by tax cuts that boost conspicuous consumption. Meanwhile, the Technology, Energy, and Health Care sectors have traditionally outperformed under Democrats. While this is a bit of a generalization, it offers valuable clues about which sectors to prioritize based on the final election outcome. Just remember, there are always exceptions. For example, Consumer Staples and Consumer Discretionary stocks have historically performed best under Republicans. However, a major part of Trump’s platform is tighter immigration policy. Considering today’s already tight labor market and recent wage inflation, this could put pressure on profits for the most labor-intensive stocks and sectors: 
As shown above, this includes both the Consumer Discretionary and Staples sectors, along with Industrials and even Technology, all of which are among the most labor-intensive components of the S&P 500. This could help with some of that small-cap stock hunting. But, then again, take a look at this other chart Mike shared… It shows that while Democrat presidencies have had a long-term edge on total stock-market returns – with Dems holding 57% of all positive total return years going back to 1928 – earnings growth was a much more important factor than who was president: 
This chart is highly illustrative to our stock selection process here at TradeSmith. In 67% of all positive years for the S&P 500, its companies turned in a net positive growth rate in earnings per share (EPS). And as Lucas Downey showed you yesterday, that’s the key fundamental metric you should screen for when seeking quality, market-beating stocks. It’s facts over feelings yet again. The next president may influence some sectors in positive or negative ways. But across all sectors, and stocks big or small, the undying ticket to positive returns is growth. That’s the ultimate, undeniable truth about how presidents impact markets: compared to the laws of financial physics, they hardly make a dent. 2024 proved an anomaly in more ways than one… If you’ve kept up with TradeSmith Daily this year, you know we’ve been keeping a close eye on election-year seasonality. For reference, here’s the seasonality chart of the past seven election years for the S&P 500 ETF (SPY), along with this year’s price action in dark blue: 
Notice something off about the chart? Us, too. The weakest seasonal period of the year, from late August through October, hardly came to pass. We had a quick dip at the start of September and have since just kept trucking higher. Seasonality trends have been defied in 2024. And that’s a strong sign for the end of this election year. If stocks have held up so well in what’s traditionally a lousy period during election years… just think about how they’ll perform in the strongest period of the year, set to begin right about now. This means any down day is a buy in our book. And if our friends at The Freeport Society are right, we might get those down days as soon as next week. Already, election anxiety is sky-high. When I caught up with Charles Sizemore about his Freeport Society research, he shared that 6 in 10 respondents to a new Forbes Health survey shared that their mental health had either been “slightly, moderately, or significantly negatively impacted” by the upcoming election. That includes investors. And when investors are fearful, volatility spikes…causing dramatic price swings. Wealthy investors know this. It’s why, according to Swiss investment banking giant UBS, 77% of surveyed wealthy investors said they had plans to make portfolio changes ahead of the vote. These folks are getting ready – and that’s what we need to do, too. Because volatility creates huge opportunity for folks with the right trading plan. The strategy Charles Sizemore and Louis Navellier recommend is purely quantitative. It tracks massive capital flows into specific stocks as those deep-pocketed Wall Street investors move their money around. Their free webinar on this topic, The Day After Summit, is available now. Charles and Louis will share not only the best way to navigate the chaos, but also a specific post-election trade for everyone who attends. It’s designed to pay off no matter who wins the election. Click here to watch now and get a plan in place for the market chaos that’s coming. To your health and wealth,  Michael Salvatore
Editor, TradeSmith Daily | 
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