November 08, 2024 | Read Online

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"You think because I'm kind that it means I'm naive, and maybe I am. It's strategic and necessary. This is how I fight."

— Waymond Wang, Everything Everywhere All at Once

Friday many worlds charts

Like Waymond Wang navigating a dizzying series of branching timelines in "Everything Everywhere All at Once," investors should brace for things to get weird: Donald Trump's re-election vastly increases the diversity of potential future investing worlds.

Things were already getting weird this week with Germany calling a snap election, China deciding to hold fire on fiscal stimulus in preparation for a trade war, and US retailers building inventory to brace for tariffs.

Investors, by contrast, are emphasizing the positive: The US stock market added $1.62 trillion of value on Wednesday, its biggest-ever day-after-the-election-day gain and its fifth-best one-day gain of any kind (in nominal terms, which is admittedly not that hard from an all-time high).

What's it mean?

One way to look at it is that if the market was pricing in Nate Silver's 50% odds of a Trump win, a $1.62 trillion gain implies that investors must believe Trump's election is worth $3.24 trillion of additional value to US equities.

If so, that's presumably because we now have four years of tax cuts, deregulation and economic expansion to look forward to.

But there's also higher tariffs, a smaller workforce and bigger deficits to worry about, as the bond market briefly acknowledged with a post-election selloff.

Bonds are finishing the week near unchanged, however, and that may suggest investors are pricing in a best-case investing world in which Trump delivers on all of his pro-business promises and fewer of his pro-nativist ones.

Whether you share that rosy outlook is probably a function of who you were rooting for this week.

But with election season mercifully behind us, it's time to take our emotionally charged politics hats off and put our cool-thinking investor hats back on.

That done, I encourage Trump supporters to recognize the downside risks of his agenda and Harris supporters to recognize the upside ones.

Because, however Tuesday's result made you feel, the one thing we should all be able to agree on is that the US economy will now have fewer guardrails — and that fewer guardrails means more unpredictable outcomes.

Among other things, Trump has reportedly promised to leave AI unregulated so that the US doesn't fall behind China in the race to AGI.

That seems like the right thing to do (because what's the alternative?) but we should also acknowledge that we don't really have any idea of what the result will be.

For a visceral sense of how weird things might get, have a listen to this audio excerpt of what happens when two AI-generated podcast hosts find out they're not real.

What happens when investors find out that markets could get equally weird is anyone's guess — but I, for one, am going to naively (and strategically) hope for the best.

Let's check the charts.

Trump trades:

Private prisons (GEO Group, CoreCivic) and government-sponsored lenders (Freddie and Fannie) were the biggest Trump trades, up 70-90% on the week. Bitcoin was a laggard by comparison, up just 22%.

New year-to-date highs in everything, everywhere — and all at once:

The "Trump trade" turned out to be in nearly everything, though. The S&P 500 (purple, +5% on the week) hit its 50th all-time high of the year today, but was upstaged this week by small caps (orange, +9% on the week) and banks (blue, +11% on the week).

Best ever:

The S&P 500's 2.2% gain on Wednesday was the most enthusiastic market response to a US election of all time (in an admittedly small-ish sample size of about 25).

Crazy Town? Already?

The equity strategists at Stifel see "upside to the low-6,000s in a few months" but then warn of "1,000+ points of downside to ~5,250 a year later." The strategists at UBS, however, think things could get even crazier with upside all the way to 6,600.

Have we seen this movie before?

In 2018, Trump's tax cuts contributed to a 21% gain in earnings-per-share for the S&P (the blue bars, above). Subsequent tariffs led to a small decline in earnings (the red bars), but a 16% decline in earnings for the industrials sector (not shown). Now, "Wall Street analysts think a new wave of tax cuts could boost EPS somewhere between 5% and 10%," the WSJ reported. "The impact [of tariffs] might be starker this time, particularly if other nations retaliate strongly."

No change:

The interest rate market is (so far) not pricing in any significant change in monetary policy — which might explain why the stock market seems to be pricing in a best-case scenario for earnings.

It could get even best-er:

Per @ISABELNET_SA, "from Election Day in November to the end of the year, the S&P 500 index has historically seen a median return of 4%, reflecting a seasonal pattern where investor optimism and holiday spending boost market performance."

The bigger picture:

It wasn't just the election that amazed us this week. NASA released photos of Jupiter sent back from the solar-power Juno spacecraft — a spacecraft that took five years (longer than a presidential term!) to reach its destination.

I take that as a timely reminder that the world is far bigger than politics and that the world of possible outcomes — in investing and otherwise — is larger than we can imagine.

(Unless you're Waymond Wang.)

Have a great weekend, kind readers.

— Byron Gilliam

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Trump's Win, Portfolio Positioning and Crypto's Return to the US

From BTC's immediate price surge to the potential for a US bitcoin reserve, the Empire hosts discuss how the regulatory landscape could dramatically shift in crypto's favor. Tune in for insights about why prediction markets emerged as crucial information sources during the election.

Listen to Empire on Spotify, Apple Podcasts or YouTube.