The market will react to this summer’s volatile election campaigns… But how will it affect your portfolio?
The bell has rung and it’s all clear to buy stocks, right?
The market has a way of sucking people in at exactly the wrong time. As the major market indexes approach historical highs yet again, the shadows on the wall threaten to become real monsters.
At the top of the list of things to be worried about is the Presidential election. With the race at a dead heat, uncertainty is at a peak. And Wall Street hates uncertainty.
Add in the unknown of a Republican outsider candidate, and you have the potential for lots of fireworks. One thing we can count on is a summer of negativity. The candidates show no signs of slowing attacks, and the gloves have been off for some time.
Expect lots of blood.
How will the market react to the beat downs? Who knows, but it will indeed react. The potential for a volatility spike this summer is rising by the day. Whether the market goes up or down is anyone’s guess.
Making money in such an environment will be difficult at best.
What, then, is an investor to do?
Here are three tips for surviving the Presidential election season and any resulting melt ups or meltdowns:
Proper Asset Allocation
This is no time to be a hero.
Is it wise to be 100% aggressively long when there’s so much uncertainty? No, it isn’t. Caution should be the key word of the season.
Stocks are at the top of the trading range, and valuations are high relative to expected profit growth. The yield curve is flattening, increasing the odds of an economic slowdown.
The wise investor response would be to play things close to the vest.
I prefer a market-neutral strategy. That means owning some stocks long and selling short other positions.
With the right stocks an investor can still make money on the long side while also making money on the short side.
The net/net of a market neutral strategy is that risk is reduced while returns are still made.
You won’t get rich being conservatively positioned, but you won’t get killed either when the invariable nuttiness of the campaign and its impact on the market reaches a crescendo.
Use PEG as Your Guide
I like to think of PEG as the PE Gap: the difference between a company’s expected profit-growth rate and its price-to-earnings ratio.
Generally speaking, when investors are in a buying mood, they’ll gravitate to those companies that are able to grow profits at a rapid clip. All the better if they can buy that growth at a cheap price.
On the short side the opposite is true. Ditch those stocks that are trading for nosebleed premium valuation while growth is stalling or, worse, falling.
This remarkably simple strategy should be deployed exclusively when building your portfolio for the summer Presidential election season.
While the summer (and perhaps beyond) promises a tumultuous ride, there will be opportunity to exploit using PEG as your guide.
Target and Exploit
The market is far from efficient for a multitude of reasons.
That’s no matter to the investor looking for a strategy to deploy during the Presidential election. There will be inefficiencies to exploit no matter what direction the market moves.
The pendulum often swings too far, and in those circumstances investors need to pounce. Specifically, I’m licking my chops analyzing the retail sector. The recent decimation opens the door for a contrarian play.
Prices across the board have come down, including retail stocks that are performing. Even those that missed earnings in the first quarter are likely to rebound as operating conditions and stronger economic GDP growth takes hold.
It’s quite premature to call the death of brick-and-mortar department stores. In the near term, one can expect the oversold conditions in both names to subside no matter the long-term future.
I’ll also look at selling gold-mining stocks. Gold has rallied nicely as inflation and a dovish fed dominated the headlines this spring.
With the Federal Reserve poised to increase rates, the hawkish behavior of the central bank will kill the gold trade.