My Perspective on the Markets Following the Election

This has certainly been an action-filled week.  Trump’s landslide victory and the likely Republican control of Congress will have huge implications for the markets over the coming years.  I almost always refrain from making any sort of political commentary, but this election warrants a few comments.  First of all, it is clear that the cumulative impact of inflation is taking a toll on the average American.  The Fed can talk all day about inflation moderating and dropping towards the Fed’s target rate of 2%, but their talk is meaningless to the tens of millions of Americans who are seriously struggling to pay their bills.  

It is eminently clear that the Democratic Party has lost touch with working class Americans.  Bernie Sanders, the Independent Senator from Vermont who caucuses with Democrats, wrote a scathing commentary after the election that pretty well summarizes the economic reality in America that I have been writing about for many months.  "It should come as no great surprise that a Democratic Party which has abandoned working class people would find that the working class has abandoned them," Sanders wrote. "First, it was the white working class, and now it is Latino and Black workers as well."

He chastised Democratic leadership for defending "the status quo" while Americans "are angry and want change."

"Will the big money interests and well-paid consultants who control the Democratic Party learn any real lessons from this disastrous campaign? Will they understand the pain and political alienation that tens of millions of Americans are experiencing? Do they have any ideas as to how we can take on the increasingly powerful Oligarchy which has so much economic and political power? Probably not,"

While I don’t agree with all of Sanders’ political views, I think that his assessment of the election was spot on.  Political elections in the US are BIG business.  According to PBS, a very reliable independent news agency, $5.5 billion dollars was spent on the race by presidential candidates, political parties, and independent interest groups trying to influence federal elections.  When congressional races are factored in, the cost of 2024 campaigns jumps to $15.9 billion.

In 2024, Democrats spent about $6.7 billion, Republicans spent about $7.6 billion, and third-party candidates, including Robert F. Kennedy Jr., spent a little more than $500 million. Adjusted for inflation, that’s more than 2.5 times as much as any third-party candidate since 2000, when third-party candidates spent nearly $197 million.

We don’t need to be very clever to realize that American politics have massive implications for the economy.  Special interest groups, consultants, advisors, and others spend a literal fortune trying to influence people to vote for the candidate who will presumably implement policies favorable to the companies and industries they represent.  This is natural enough, but ultimately, the reality of the typical American worker and American family won out over the fancy,  high-paid advisors and consultants.  Price rises have been very painful, and people are fed up.  They hate working two or more jobs to support their families, and they resent the economic analysts touting the wonderful US economy and the strong stock market.

Alright, enough of my political commentary.  Let’s focus on ways to make some money through some clever investment strategies.  First of all, as I have written for the past several weeks, it is time for gold and silver to take breathers.  They have had huge rallies, and the markets simply got overbought.  Corrections to massively overbought conditions are natural parts of a healthy trend.  The policies that we are going to see both fiscally and monetarily almost ensure that eventually these markets will rise over time, but we need to be patient.

With a crypto-friendly President, and many crypto-friendly members of Congress, coupled with some growing mistrust of the US dollar, Bitcoin is rallying strongly.  Yes, I advised taking some partial profits on our long positions around $70,000, but that was for the discipline of maintaining sound money-management purposes.  I persist in my view that Bitcoin is on its way to $90,000 +/- before it has another vicious correction.

My insistence on taking partial profits after a big run in a market is the result of a tough lesson that I learned when I was studying Sanskrit and Indian philosophy in graduate school.  I wanted to be a professor, and I had just completed my translation of an obscure 8^th century Sanskrit on karma and rebirth.  My commentary was nearly done, and I just needed to start preparing for my final defense of my dissertation in order to get my doctorate and hopefully find a teaching job somewhere. 

My long-time advisor, Dr. Wilhelm Halbfass, was a wonderful man and a remarkable scholar.  He was also very honest and transparent with me.  I finally asked him about my job prospects as a professor of Indian philosophy, Sanskrit, and Bengali, and he took a slow, deep breath and sat quietly for almost a minute.  Finally, he said, “Andy, you are a very promising scholar.  Your Sanskrit is excellent.  Your work ethic is terrific.  You love the material.  I love working with you, and I will always support your efforts to find a good job.  Frankly, I was surprised you never really asked me about this sooner, but since you have had your education fully covered by special grants and awards, I figured you didn’t need to worry too much about finances.  Anyway, if you take the twenty professors in our area of expertise and put them in a bus – and then drive the bus off of a cliff – then your job prospects are pretty good.  There isn’t much demand for people like us as most students aren’t very excited about learning what we want to teach.”

Wow!  I had invested years of hard work in this field, and I felt like someone just punched me in the gut.  I had taught tennis each summer to make some decent money, and I had accumulated some savings.  In a state of near panic, I decided to start speculating on the market.  I was very bullish on gold (yes, I was interested in economics, so I kept abreast of developments in the markets), and I thought it would head to $2,000 eventually.  I poured a bunch of my meagre savings into a couple of Canadian penny stocks.  The stocks were all trading for less than $1, and almost immediately gold started to rally sharply, and the stocks surged higher.  One stock in particular rallied up to $12.00 from $.40, and I was feeling pretty smart.  My savings had just increased 30-fold, and I was feeling more relaxed about my very uncertain future employment.

So far, so good, except I didn’t take profits on any of my positions.  I started thinking about how much money I would make if gold kept rallying.  Of course, gold sold off and my investments went to zero.  Yup.  I took a total loss on my big play, watching in shock as the share prices kept dropping further and further until eventually the stocks delisted.  It was the best lesson I ever received in the markets.

I worked very long hours that summer, teaching tennis to as many students as possible.  Halbfass advised me to shift over to Wharton for an MBA and arranged for me to continue to receive a full academic scholarship as long as I continued to study Sanskrit and Bengali.  My rough lesson about managing profits occurred over forty years ago, but I have never lost sight of it.  Managing losses is easy.  When you hit your predetermined loss level, you exit.  Managing profits is much, much harder.  It is when weird hopes, dreams, and ambitions can take hold and cloud one’s objective, independent assessment of the markets.  Put more bluntly, it is when greed can take over. 

There are many ways to manage profits, but all of them require objective rules in order to avoid the blunder that I experienced in my foray into Canadian mining penny stocks.  Over the coming months, we are going to experience enormous volatility in the markets.  I expect that we will have many opportunities to book excellent profits with some of the ideas discussed in my write-ups, and I really hope that you remember to learn from my early mistake and getting way too greedy with a winning position and refusing to take at least a partial profit.  There will always be another trade and another excellent opportunity, so don’t feel bad if you take some money off the table and the market continues to go in the same direction.  We will find new trades to enter and new money-making opportunities.

My trading is a funny mix of fundamentals, technicals, psychology, trend following, counter-trend trading,  and detailed analysis of the underlying options market.  Yes, I look at Elliott Wave formations – tens of millions of traders and speculators do this, so I want to understand what they are thinking without having to make lots of phone calls.  I also look at various trend-following parameters such as moving averages and momentum factors.  Ultimately, however, I see the job of a trader or investor as being one of structuring excellent risk-reward bets.  

How does this play out?  Let’s say that I have a block of funds to manage.  For a client who is seeking good, risk-adjusted returns that are steady and not too volatile, I will typically target about an 18% annual return, net of fees.  This means that I don’t want to lose more than 2% of the assets in a month.  This also means that each of my typical market bets won’t risk more than one quarter to one half of a percent.  That doesn’t sound like much, but it works since I will usually have on a basket of non-correlated bets that combined usually have a daily volatility of about one half of one percent.  That is about half of the volatility of the stock market.  As long as we can achieve returns like that, our investors will be very happy. 

My bets fall into different categories, and this is important to understand when you are taking your own bets.  I have one category that has a very, very high probability of making a modest profit, but a very low probability of losing any money.  This is a somewhat boring, unexciting bucket of ideas that I typically won’t write about.  Another bucket is comprised of lower probability bets that will have enormous returns on the amount of money allocated to each bet that works out.  For example, we recently thought that Coinbase could have an explosive rally after the election in case Trump were to win.  We figured that Bitcoin would surge on a Trump victory and that Coinbase options were a good proxy for Bitcoin.  We bought some short-dated call options struck at $240 when the stock was trading at $182.  They cost us a few dollars.  We sold them on Wednesday after Coinbase rallied over $60,  The options had increased about 10-fold.  It was a low probability bet since they were so far out of the money, but we also liked the technical set-up in the stock.  We just didn’t expect a 30% rally in the stock in less than two days.  For a trade like that one, we allocated a tiny percentage of our assets, but the portfolio is now up nicely on the month.

As you can see from the chart below, Coinbase is a wild stock that can suddenly explode 30% higher, or plunge lower on some silly news.  Accordingly, we size our positions so that idiotic moves in the stock will give us a nice boost, but never put more than a tiny amount of our capital at risk.

Sure, we could have invested a bigger amount of our money into this idea, but betting on a stock to have a dramatic rally like this is clearly one of our lower probability plays. Other trades that have higher probably returns will get larger capital allocations. 

Going forward, it is almost inevitable that the stock market will take a little breather.  The rally since the election has been very powerful, but it is time for a pause.  Depending on the nature of the correction, I will be forecasting either a more sustained surge before a very, very nasty correction, or a shorter-lived, more modest rally to further new highs before the inevitable deeper correction.  

As I have been writing for many, many weeks, I was expecting a blow-off top, which means that I have been expecting the former of these two scenarios.  After a modest corrective pause, I think the market is likely going to get very excited and push the stock market aggressively higher to levels that seem absurd by any historic valuation metric.  Experts will tell us that this time it is different.  There will be lots of stories about the economic boom that the Trump administration will bring in, and people will continue to pour money into stocks.  Unfortunately, this time won’t be different.  It never is.  The blow-off top will likely be the end of a wonderful bull run in stocks that presages an absolutely vicious correction.  

How long will this mania last? I wouldn’t be surprised to see the market’s overall strength continue into the new year, but then we need to strap ourselves in for one almighty sell-off.  Next week I will write about the actual policy shifts that I see coming and how these shifts are likely to play out in the markets.  In the meanwhile, we persist in our thinking that the yen weakness on the crosses is close to a turning point.  I will also have more to say about that.  

Until then, I wish you all the very best of luck with your trading.