Will Stocks Greet Pres. Trump with a Rally? Prepare for Ups & Downs.
As the US watches the peaceful transition of power from Pres. Barack Obama to Pres. Donald Trump, American citizens have hopes and questions and investors will express their uncertainties and enthusiasm by driving prices both up and down. Traders should know how to profit in both directions.
By Vikram Rangala
Friday, January 20, 2017 - 00:00
Vice-President Mike Pence told reporters that Monday is going to be the first full working day of the new administration. President Trump will visit CIA headquarters in Langley, VA, on Saturday and have other meetings, but his spokespersons have indicated that they will not take any major actions on Friday after the inauguration ceremony.
On the political side, we are unlikely to see any immediate action on some campaign promises, such as changes to immigration policy, a repeal of Obamacare, or any prosecution of political opponents. Similarly, on the economic side, investors may not get any clear signals about economic policy which they can react to.
US markets rose Friday morning, with the Dow Jones Industrial Average climbing back above 19,800 and moving back into positive territory for the year to date. At the same time, US Treasuries dropped to their lowest level of the year and gold rose above $1,200 an ounce.
Though "year-to-date" only encompasses a few weeks of trading, the markets' mixed and indefinite action during this time reflects a larger uncertainty. Investors are mostly not ready to take firm positions with large commitments of capital yet. They are waiting to see whether the Trump administration will follow through on its campaign promises to boost growth.
Meanwhile, there isn't unanimous agreement on which of those promises would actually be "pro-growth." The incoming administration faces an economy dominated by a strong dollar, which casts its shadow over all the markets and all investor decisions. The new president has promised a combination of tax cuts and infrastructure spending that may be difficult to deliver.
The combination can lead to increased budget deficits, which the budget reconciliation report of the new Congress appears to confirm. That document, a blueprint for the budgets of the next decade, projects annual deficits increasing to over a trillion dollars in ten years. There's an old and robust debate on the pros and cons of deficit spending that is likely to be revived. The new president's attitudes towards trade and protectionism will also soon turn into specific policy proposals—but no one is certain what those will be.
Adding to investor uncertainty are the sometimes differing statements of President Trump and congressional leaders. For example, Pres. Trump has said that any Obamacare replacement would provide insurance coverage for "everybody." The GOP-majority House and Senate have not proposed this. Congressional leaders have also disagreed with Pres. Trump's call for a 35% tariff on imports.
All these policy uncertainties are further compounded by questions about how much opposition Pres. Trump may face, with the lowest approval rating (40%) of any incoming president since the 1930s and significant opposition even within his party. Inauguration Day is a moving and one might say, almost miraculous display of democracy in action, with a peaceful and dignified transfer of power and an affirmation of American unity. But as the nuts-and-bolts work of policymaking gets underway, the economy and markets may see more volatility.
Rather than trading the news or politics, many traders prefer to focus on the actual price action of the markets. That action goes both up and down and we're likely to see big moves in both directions in the coming months.
There will be great opportunities in both directions as well. That's why smart traders master the short side so they don't miss out on the downside opportunities. Here's a simple explanation of short-selling from the upcoming Nadex ebook, Trading Volatility.
Imagine you know someone in your town (let’s say Chicago since Nadex is in Chicago) who wants to sell his used Toyota. And you know someone in Detroit who wants to buy a used Toyota. You make a deal with your friend in Detroit to sell him a used Toyota next week for $20,000. You then buy your Chicago friend’s car for $18,000, drive it to Detroit, and keep the $2000 difference as your profit (minus gas). You made the sale first, then bought.
Notice that you still followed the basic rule of “buy low, sell high.” You just reversed the order. Short-selling is really just that simple.
In the long-run, we may well see the Obama bull market continue as a Trump bull market. Let's be optimists and wish our new president the best in achieving new levels of prosperity for all.
Along the way, as the President said in his inaugural address, "We will face challenges. We will confront hardships. But we will get the job done." To trade those challenging periods and even the short dips and corrections, make sure you have a secure, limited-risk way to sell the markets and profit from downside moves. One great way to start is to get a Nadex demo and practice selling downside moves. You'll soon find that it's just as easy as going long, and often can be quicker.
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