The stock market would hold a Democratic whip in November


The stock market loves President Trump. Its policy has been the main factor behind the rise of the market.

Some people think that if there is a Democratic whip in the November election, many of Trump’s policies will be reversed and taxes will increase. Based on that analysis, the stock market could fall about 20%.

But for rare birds trying to understand the stock market rationally, it can come as a shock that under one scenario the stock market could rise about 12% on a Democratic whip. To understand this scenario, think of a party of drunkards where everyone loves a person who serves the most alcohol. Currently, the stock market behaves like a party of drunks. The equivalent of alcohol is massive borrowing and money pressure. Thus, the stock market is holding a potential Democratic whip, because Democrats will borrow more than Trump has.

Affecting investors can be tricky. How would the borrowed money be repaid? Is there a loan limit? To help navigate these treacherous circumstances that drive the stock market higher, let’s explore using a map.

I want to add that I am politically agnostic. My sole purpose is to help investors. This is not a politically motivated column.

Graphics

Please click here for an annotated chart of the S&P 500 ETF SPY,
+ 0.12%,
which follows the benchmark S&P 500 Index SPX,
+ 0.10%.

Consider the following:

• The graph shows the measured target for the stock market is S&P 500 level of 3,800 points from a technical perspective.

• The target is based on excluding the dip of coronavirus in a red rectangle on the map. If this dip were not ruled out, the purpose of the stock market would be higher.

• The reason for excluding coronavirus dip is that this is an abnormal one-time situation that is unlikely to recur. Furthermore, the expectations at the moment are that there will be a fax.

• Shopping zones are powerful. They often give investors opportunities to buy good stocks and ETFs at great prices. The chart shows that many stocks and ETFs fought in Arora buying zones during the market wave, including Apple AAPL,
-0.34%
and Microsoft MSFT,
-0.15%.

• The stock market is hesitant to reach a new high in the S&P 500 due to rising interest rates. Interest rates have increased from a low of 0.51% to 0.71% on 10-year Treasury. This has been the result of inflation indices that came faster than expected.

• Note that the Dow Jones Industrial Average DJIA,
+ 0.24%
is lagging behind the S&P 500, but the Nasdaq 100 NDX,
-0.14%,
represented by the Invesco QQQ Trust QQQ,
-0.11%,
has outperformed. The Nasdaq has performed better due to a heavy weight of shares, including Apple, Facebook FB,
+ 0.18%
and Alphabet GOOG,
-0.43%
GOOGL,
-0.44%.

• Semiconductors have been a leading sector. Applied materials AMAT,
+ 3.13%,
a major vendor of equipment for semi-finished production, reported just blowout revenues and higher leads. Investors should also consider viewing AMD shares,
-0.96%,
Nvidia NVDA,
+ 0.13%
and Qualcomm QCOM,
+ 0.21%
to measure sentiment.

Trump policy

The stock market has, to a large extent, gone up due to the expansion of price-to-earnings multiples. That expansion is thanks to the following Trump policy:

• Taxes for companies.

• Less regulation.

• Jaw-bonding from the Federal Reserve to lower interest rates and push more money.

• Heavy loan by the government.

Democratic whip

In theory, based on rational analysis, a Democratic sweep could send the stock market 20% lower. Please see, “The cost of Biden’s financial plan for the share is more than you might think.” According to initial understanding, the stock market is now in love with a potential Democratic whip. The reason is that Democrats would borrow significantly more than Trump would. Democrats would increase taxes, and that would reduce earnings. For the longest time, the wisdom was that the single best determinant of the future of the stock market was revenue. Now profits do not earn. It is the liquidity in the market that matters. More borrowing not only provides more liquidity but also more expenses. More spending can offset some of the hit to income due to higher tax rates.

What does it all mean?

Affected investors should follow the concept of protective bonds. The high band of protection is appropriate for those who are older than conservative. The low band of protection is suitable for those who are younger than aggressive.

This is the only realistic way to protect yourself while taking advantage of the stock market bubble as it grows.

Announcement: Arora Report portfolios have positions in Apple, Amazon, Alphabet, Microsoft and Facebook. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. He can be reached at [email protected].

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