The Trump Rally

For almost the past 24 hours, Zerohedge has had as their lead story the idea that Trump's election is a lock and Wall Street is now going ALL IN the Trump trade.

“We are expecting an upward trajectory in the US equity markets...Barring Biden pulling ahead in substantial fashion, all pullbacks should be bought.”

Ok, let's put politics aside. I think it's highly likely Trump gets re-elected and I think that it's also highly plausible that the "Trump trade" is the dominant trade of 2024. The question on the table now is, will it pay off?

The fact that Wall Street has Trump re-election as its latest investment fad idea doesn't necessarily mean it's an investable hypothesis. One could argue that the heavy positioning Wall Street has put on in recent weeks is fear of missing out on this newfound Trump trade. That said, the belief that all pullbacks should be bought is fraught with a large amount of risk. Historically, the behavior of the stock market before an election is distinctly different than how it performs AFTER an election. Even if Trump is the presumptive nominee, we still don't know the composition of the House and Senate at this point in the year. Which means that many of his policies may not get passed.

Another factor to consider is positioning ahead of an event. If an event is too widely anticipated then it will not have the market impact that everyone expects. Looking at the market during Trump's first year in office from election to his tax cut shows a 38% rate of return. Measuring this latest rally from the November 2022 low to yesterday which coincidentally is the six year anniversary of Trump's tax cut, is 36%.

Adding exposure solely based upon an election is to ignore all other market risks, which includes a massive housing and Tech bubble, China meltdown, and incipient bank crisis. What if the real buying opportunity in 2024 is -50% lower? Only a pundit would assume that's an investable hypothesis.

Ironically, the sectors usually associated with Trump policy are Financials and Energy. However, currently those two sectors are vastly underperforming the market. Which makes absolutely no sense if in fact the Trump trade is now on in size as Zerohedge suggests. Does this hypothesis allow for a bank run prior to the election? What we know is that Congress will be highly unwilling to bailout anyone ahead of the election due to how it would appear politically. We also know that the Fed will be reluctant to lower rates ahead of the election for how it would appear politically. So those buying into this newfound hypothesis are onboarding gargantuan policy risk.

Here's an interesting article on this subject:

"Goldman Sachs found that Tech is usually the worst-performing sector in the year leading up to the general election, while Utilities and Consumer Staples tend to outperform"

"No matter who wins, some industries will be facing an uphill battle."

"Biden has not been friendly to China, but Trump's going to be even worse...When you look at Trump, he's mercurial and could just cut off the tap... and tell Nvidia they can’t sell anything."

"A total ban could be a massive hit to American chip giants. China accounted for about one-third of the sector’s global sales in 2023"

Got that? The best performing stock and sector for the past year not only underperforms ahead of an election, but is most likely to lose massive market share after the election under ANY scenario.

Wow.

Who is going to tell Nvidia gamblers they are buying the stock that embeds the most political risk in 2024? Who is going to tell Ed Yardeni that his imagined reality of Nvidia becoming the next Cisco and an all new Y2k Tech bubble is the least likely scenario under any administration?

No one.