Keep Calm and Invest On…. This simple saying is what will make you money through the inauguration.
The Markets are shooting higher on the election of Donald Trumps as the 47th President-Elect of the United States.
[Tuesday] night’s victory sent futures more than 2% higher as investors blindly bought the markets higher. The trend continues this morning with the S&P 500 and other indices trading more than 2% higher.Many investors are trying to figure out how to set their portfolios up for success over the next four years of a Trump Administration. I’m here to tell you that you’re wasting time doing that, for the moment.
Instead keep an eye on the big leadership today and plan on riding that out over the next 75 days until Trump takes the oath of office for the second time.
Let’s break it down.
The “Risk-On” Trade is in Full Effect
Let’s start at the top. The notable mover is the small cap Russell 2000 Index. This index of small cap companies was punished over the last three years as interest rates and inflation hit the “mom and pop” stocks in the market.
The Trump win suggests that voters trust Trump to do what is needed to spark a stronger economy over the next four years.
With Trump moving into the White House, investors are now willing to speculate that the economy and the market will return to a more robust outlook instead of being driven by a handful of companies like the Magnificent Seven.
That Risk-On Trade Includes Bitcoin
Bitcoin shattered through the $75,000 price as the polling results started tilting to Donald Trump.
That’s a powerful combination of “Certainty” and “Risk-on” shifting the cryptocurrency into a strong bullish breakout.
For the last three weeks, Bitcoin has shown the tendency to move higher, though not making a convincing technical move towards a breakout.
That hesitation was due to the uncertainty surrounding the election. It’s not that the market feared a Harris Victory, but more that investors were expecting things to be more closely contested.
Think 2020 or even better, the election of 2000.
In both of those elections, investors had to wait for results to be official given the razor thin margins that led to legal challenges.
The market hates uncertainty, which is why we saw volatility and lower prices in the risk-on assets in 2000 and 2020.
Not the case today, investors can get back to the business of investing, meaning that more risk assets are going to flow into stocks and other areas of the market.
Last night’s sound victory sets the market up for a strong performance through the end of 2024. Frankly, a strong victory for Harris would have had some of the same effect on Wednesday, only a few of the larger movers would have changed.
Here are the Top Two Investments to Hold Through the Inauguration
Russell 2000 Index ETF (IWM)
The small cap is set to benefit from the “certainty trade” and lower rates.
The Fed is set to announce their interest rate decision on Wednesday afternoon, but the Trump victory changes the outlook for 2025.
During his first tenure in the Oval Office, Trump was an outspoken critic of Jerome Powell’s hesitation to lower interest rates to negative levels. The Fed Chairman stood his ground on the pressure, but things are different now.
With rates significantly higher, President-Elect Trump is likely to begin pressuring the Fed to lower rates to near-zero levels as fast as possible.
While that may do damage to other areas of the market, the small cap Russell 2000 stocks would benefit widely from lower rates.
The Russell 2000 Index just cracked all-time high prices on Wednesday morning. Expect to see investors chase those prices higher through Inauguration Day.
Regional Banks
Another group of stocks lined up to benefit from aggressively lower rates are the regional bank stocks.
These stocks suffered through failures in 2023 and fear of the commercial real estate market failing in 2024.
Now, lower rates will help to refinance some of the billions in looming financing at slower rates. This is something that was likely to cause failures if rates had stayed higher in 2025.
Larger banks will benefit too, but the real value trade among the financials rest in the Regional Bank ETF (KRE).
Wednesday’s 11% rally is the beginning of what should be a strong 20% drive higher into the inaugural festivities.
What Not to Buy Right Now
I know what you’re thinking… “I’m going to buy all of the oil companies CJ, Drill Baby Drill”.
Hold off on that thought.
Energy stocks are trading higher on Wednesday, but the move is not likely to be a new trend setter.
Energy stocks are in a precarious position as we’re seeing two things that drive higher prices disappear.
First, geopolitical events.
Over the last year we’ve heard Donald Trump talk about how he will solve geopolitical problems in a few areas of the world that are directly tied with Oil prices.
While that’s good for the world, it’s bad for investors that are positioned for higher oil prices.
There’s a longer game reason why this sector may be one to avoid over the next four years, but we’ll get to that later in the week.
Oil Prices are down the day after Election Day and they’re likely to continue that trend. For that reason, resist the urge to buy these stocks on the “Drill Baby Drill” plan.
The pop in the Energy ETF is nice, but expect it to fade quickly over the next two weeks.
— Chris Johnson
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Source: Money Morning