Copying the Greatest Investor of All-Time's Election Trade
This is a high-conviction idea I've been researching for weeks...
It seems nothing can keep this bull market down.
The Middle East is tangled in war, the upcoming November election is a coin toss between two polar-opposite candidates, Russia and Ukraine are still slugging it out, and China’s economy is stumbling, with tensions escalating over Taiwan. By all accounts, this should be a nightmare scenario for risk assets.
Yet, the S&P 500 just notched its sixth straight week of gains, surging over 8% and hitting new all-time highs. In fact, stocks are having their best start to the year since 1997, which is even more impressive considering we're coming off a +24% gain for the S&P 500 in 2023.
So, what's the deal? Why are equities still roaring while the rest of the world burns?
Why Stocks Keep Going Up
The answer is actually very simple: the U.S. economy is in the midst of a soft landing.
The S&P 500 bottomed two years ago
Inflation peaked 2.5 years ago
US unemployment rate has averaged 3.8% the last two years
Inflation-adjusted GDP is growing at ~3%
Corporate earnings continue to grow at a steady pace
With inflation in check, central banks are free to keep the global easing cycle intact. This global liquidity boom should keep short-term rates down.
However, as we discussed on last week's podcast, long-term rates seem to be rising.
And I want exposure to this trend.
Pricing in the "Trump Trade"
Rising bond yields are still the biggest headwind for stocks.
This is likely part of the "Trump Trade" as he appears to be pulling ahead, particularly in betting markets (which I view as more reliable than polls).
Rallies in banks and crypto also support this outlook, which Stan Druckenmiller mentioned in last week's interview.
Why would long bonds yields rise on a higher likelihood of a Trump victory? His fiscal plan involves increasing spending and cutting taxes, which the Committee for Responsible Federal Budget (nonpartisan entity) expects will increase the deficit by $7.5 trillion over the next decade.
This is compared to a deficit increase of $3.5 trillion under the Harris plan as she would increase spending but also raise taxes. Since the US government will be in a weaker fiscal position in the event of Trump enacting his economic policies, bond yields will likely continue to rise along with inflationary expectations. We have exposure to the latter trend via…