Analyst Chad Shoop explains why the markets will likely sell off considerably if Donald Trump wins next week’s election, and what investors can do to hedge against the pullback.
When I want to make sure my 7-year-old son has put thought into a debate we are having, I put money on the table.
It doesn’t matter if we are debating whether or not a wide receiver got both feet inbounds, or if my son’s done his chores for the week. He will tell me whatever I want to hear at first — that he made his bed or cleaned up his room. But the second I say, “You owe me $20 if it’s not done,” he will think about it more, or run to his room to check.
Putting money on the line makes it real to him.
Maybe this is a bad way to teach a kid to put some thought into his words, but the point is that when I put money on the table, it becomes real to him — before that, it’s just us talking back and forth with no benefit or punishment for being right or wrong.
That’s why when I see billionaires putting their money where their mouths are, I pay attention…
After all, talk is just that — talk.
And during the presidential race (thankfully it’s almost over), it seems like all we’ve heard is talk.
But when billionaire owner of the Dallas Mavericks, Mark Cuban, said he put on the biggest hedge of his life due to the possibility of a Donald Trump presidency, it caught my attention … and it should catch yours, too.
Your Money, Their Table
I know he is an avid Hillary supporter. I’ve seen his commentary for the past six months. But this is the first time I heard him say he actually was putting money on the table.
For me, it isn’t about whether or not Trump wins, but the delicacy of this election in general.
You have to think about it as if there is money on the table. After all, you have money invested somewhere that is clearly “on the table” come Tuesday night.
So, you owe yourself the extra diligence of checking into what will really happen in the stock market once all the votes are tallied.
There are only two plausible presidential outcomes: Donald Trump or Hillary Clinton.
There’s no need to take sides in this exercise … we’re just looking at a broad overview of either candidate’s potential impact on your investments. We’ll start with Trump…
First off, we know the markets are not expecting him to win. As his odds have crept higher during the past week, the markets have pulled back as if pricing in his victory. But they are nowhere close to fully calculating in the impact of a Trump win.
When Trump discussed his presidential plans, several economists, professionals and credit agencies compiled reports stating that his economic agenda would likely lead us into a recession.
If he wins, it won’t be about whether or not he literally takes us into a recession; it will be about these forecasts and reports that will blanket the media and cause panic on the stock market. You can see why a billionaire like Mark Cuban is hedging that possibility.
On the other hand, we are looking at a somewhat status-quo victory — a passing of the torch, if you will — with Hillary Clinton.
Without even getting into details about what rules and regulations she wants to implement, Clinton is currently under investigation by the FBI — a fact that could easily disrupt markets at any point during her presidency.
Oh, and by the way, the FBI investigation has already been resolved and reopened … so it will likely be an ongoing issue. Not to mention the tens of thousands of emails that have been hacked and dumped on WikiLeaks, with more promised to come.
Trump or Clinton: Get Hedged
To me, when I think about putting money on the table and look at the election from an unbiased viewpoint, the only logical thing to do here is to hedge your portfolio.
Remember the Brexit vote at the end of June? The markets plummeted sharply the next day, but quickly rallied and moved on to new highs because, once the vote was over, investors could get back to investing as normal.
We could easily see something similar with the U.S. presidential election. So, if you are hedged and you see an immediate severe reaction, take some profits on your hedge position … but don’t take it completely off the table.
Right now, the best way to hedge your portfolio is with put options on the SPDR S&P 500 ETF (SPY). Grabbing the January 2017 $208-strike put option should do the trick.