November 6, 2016
What can I do now?
If there are two things you take from this post:
The S&P 500 is currently heavily discounted. Buy straight after the announcement.
For those who want to get in beforehand, enter a long position in gold to capture gains from a potential Trump presidency.
Don’t sit on the sidelines. The S&P 500 is a simple yet effective tool that can be used for both short and long term gains regardless of who becomes the next POTUS.
Brexit; now this
On Tuesday, the American people will either vote for ‘more of the same’ or ‘a stab in the dark’. We all know how Brexit turned out but not everyone had the foresight to profit from it. Even those who did may have decided to sit it out because of the unhelpful myth that uncertainty equals risk. This doesn’t need to be the case. Empty Bucket entered a trade where profits could be attained regardless of the outcome. And profit we did. Read on as we explain how the election is shaping up to be another one of these opportunities.
What we did
Empty Bucket recognised a unique opportunity to profit from the Brexit referendum regardless of the outcome, by simply investing in a no-frills vanilla equity fund that tracked the S&P 500 index. Absolutely nothing complicated or out of the ordinary.
With the polls closing in, it wasn’t clear (at least to us) how the UK would vote. What was much clearer was how markets would react. Listen to any respectable economist or market commentator and they would have told you that in the case of a win for ‘Remain’, markets all around the globe would view the result favourably. Nothing much would happen as the markets had already priced that in. In the case of a shock win for ‘Leave’, cue chaos.
What we needed was an investment that allowed us to profit either way. The benefits of investing in a simple US equity fund became clear. One of the key reasons why we invested, and continue to invest, in the S&P 500 was its resilience as a long-term investment. History has shown that it just keeps going up. In the case of market expectations being confirmed, it would prove to be a validation of the status quo – the American economy is growing slowly but surely. Optimism, certainty and a string of positive economic data will consistently boost the value of the index.
As the ‘Leave’ vote demonstrated, Brexit panic wiped $2 trillion off world markets and the S&P 500 dropped by 3% presenting an immediate buying opportunity. Relative strength and confidence in the US economy attracted flows from the rest of the world as a flight to safety. What is important to note is that whether you had decided to invest in the index before or after the outcome, you would have been laughing until the bulls go home.
What does this mean for the US election?
The U.S. election is shaping up to be just like Brexit. There is no doubt that the markets favour ‘more of the same’, and have priced in a Clinton win. The jitters that have been running through the markets as a result of the ongoing email saga, have further confirmed that fact. Just like Brexit, the polls have closed the gap, and as we have seen, the markets don’t always get it right.
In the short term, a win for Clinton will validate market expectations and result in a boost for the S&P 500. The losses from the previous few weeks leading up to the election will be quickly re-gained. On the other hand, a Trump win means markets have to re-price for an unexpected outcome, just like Brexit.
Expect the S&P 500 to fall and present an exceptional buying opportunity. At the time of writing, the index has experienced its longest losing streak since 1980, already down 3%. Some indications suggest that it could move a further 3% come next Wednesday. Many would say ‘get out now.’ We say, ‘what a bargain.’
In the long term, the index will continue to be remarkably resilient regardless of election outcomes. Experience has dictated that when a Democrat takes the presidency, the S&P 500 has gained 10% on average, whereas for a Republican it has been 13%. Who doesn’t like a win-win situation? Of course, past performance is no indication of future performance. Some argue that a Trump presidency would be an outlier, but through its systems of checks and balances, the institution of the United States of America has proven its resilience time and time again. Ignoring this exceptional trait would be disrespectful and unwise. Treat the S&P 500 as an investment to buy and hold, and time will pay you well.
What if you can’t wait and want to enter early?
Add gold to the mix and you have another trade where the potential upside is massive compared to the strictly limited downside. Gold is a great way to play the election where opportunities like these are exceptionally rare.
As recent events have demonstrated, pro-Trump / anti-Hillary news is correlated with gold going up. Should Trump win, gold’s safe haven status will be fully realised as investors flock to gold and drive its price to even higher levels. If Clinton wins, markets will treat it as a non-event in the immediate aftermath of the election result.