In the lead-up to the 2024 elections, consensus among pollsters and financial strategists suggested a neck-and-neck race, with a split Congress as the likely outcome. Yet, in a nod to the unpredictable nature of electoral politics—akin to the “Red or Blue Pill” scene from The Matrix—our pre-election analysis leaned toward an outlier scenario: a Republican sweep. On 11-01-24 our report posited: “a GOP sweep continues to have merit. If such a rare event were to materialize, it could … fuel a speculative near-term surge in stock prices, bitcoin values, and bond yields, while also heightening inflation expectations. In summation, … the provocative possibility of a rare Republican trifecta—the mastery of the House, Senate, and Executive Branch—is not reflected in current market sentiments.”
During a November 5 interview on the popular FSN podcast (FinancialSense.com), I articulated my belief that voters would embrace the “Red Pill,” seeking a transformative shift in their perceived political reality, leading to a Republican sweep of Congress and the White House. We anticipated that GOP control would invigorate Bitcoin and provide a tailwind for domestic companies. The post-election landscape has indeed given rise to what is now termed the “Trump Trade.” As election results rolled in, Democratic favorites like Clean Energy plummeted, while value stocks, cryptocurrencies, financials, artificial intelligence, cyber security and interest rate yields surged without any sign of retracement.
Our expectation is that a robust phase of the new Trump era will be the honeymoon period from election day to inauguration. We might call it the “Trump Put Option,” where optimistic economic expectations can flourish unimpeded until he can begin legislating with Congress after January 20 or later. Thus far, our projections have indicated that corrections would be limited to around 3%. While deeper corrections may occur as prices reach new heights, the 3% threshold has held firm post-election.
Among the small-cap value sector, the Russell 2000 Index is a staple, but we advocate for Vanguard’s VBR ETF, which has outperformed with a 7% gain since election day, compared to the S&P 500’s 4%. With strong governmental support for domestic small businesses and the anticipated continuation of lower interest rates, small and mid-cap value stocks should thrive, benefiting from relatively attractive price-to-earnings multiples.
Perhaps the most speculative bet we anticipated was a surge in Bitcoin and related assets, such as Coinbase, Square, and Ripple. Our proxy, IBIT, has mirrored Bitcoin’s trajectory, posting a 45% gain since the election day low just weeks prior. The speculative nature of cryptocurrencies, often lacking intrinsic value, is tempered by a wave of adoption sparked by SEC Chair Gary Gensler’s endorsement of regulated cryptocurrencies. Both major party candidates have expressed support for crypto, but Trump’s backing is perceived as more robust and likely to expedite the changes desired by the crypto community, including the intriguing prospect of a government-backed Bitcoin reserve.
In this nascent phase of adoption, the consensus among forecasters is fixated on the psychological milestone of $100,000 per Bitcoin. We characterize this adoption phase as being in its early innings, with ample opportunity for enthusiasm to build before Trump takes office. Our sentiment analysis suggests sufficient buying power and minimal governmental roadblocks should stave off significant corrections, likely limited to a modest 8% to 20% in Bitcoin, until prices clearly breach that $100,000 mark. This environment is conducive to a “buy the dip” strategy in the short to medium term.
Due to the excess liquidity and inflationary stimulus from post-COVID measures, the contraction in services and manufacturing during 2022 did not precipitate a broader economic downturn, nor did it lead to rising unemployment. The Trump administration’s ambitious plan aims to achieve what many consider a Sisyphean task: increasing government spending while simultaneously reducing the annual budget deficit through tariffs and the elimination of waste and fraud. Historically, no president has successfully curbed the sprawling federal apparatus or its nearly three million entrenched employees dedicated to unchecked spending. While this endeavor to tame the Federal leviathon may seem quixotic, it reflects the scorched-earth approach that some fear is on the horizon.
The silver lining is that the economy remains resilient, buoyed by low unemployment, minimal consumer defaults, and robust consumer demand. The service sector, which constitutes nearly 80% of the economy, is thriving. The dovish sentiment related to Trump, coupled with a Fed put option promising lower interest rates, helps limit downside corrections. Our forecast for benchmark S&P 500 corrections to remain capped at 3% has so far proven accurate, at least until we break through to new record highs. The bullish grace period until January 20 should continue to provide a supportive floor for stocks, with perhaps a 3% to 5% risk in the S&P 500 from higher levels.
Short-term traders may face volatility in the wake of Thanksgiving, but we remain optimistic about the market’s potential and the economy over the next couple of years. Our investment focus will continue to be on sectors such as crypto, data centers, AI, banks, cybersecurity, small and mid-cap value stocks, and natural gas infrastructure—especially as we look to capitalize on pullbacks.
{Related ETF/Stock symbols: IBIT, NVDA, KRE or GBCI, CIBR or PANW/ CRWD/PLTR, VBR, ENB/LNG.}
