Your Election Season Battle Plan, Part 2

Shah Gilani|July 12, 2024

As passions flare ahead of the presidential election, so will stock market volatility.

That’s not just an assumption based on historical trends…

It is a reality that traders and investors need to prepare for.

The divisive politics in the U.S., competing and conflicting economic policy prescriptions, and especially the rhetoric surrounding the election itself will shake markets.

Last week, I said long-term investors should focus on fundamentals in order to survive the racket of the election season.

And today, I’m going to show you how to navigate volatile markets by using both narrative trading tactics and traditional fundamentals.

Why Elections Cause Volatility

Presidential elections bring with them a significant amount of policy uncertainty.

Each candidate presents different economic policies that can impact taxes, regulations, and government spending. Investors get anxious about the potential changes that could affect corporate earnings, economic growth, and their money.

The stock market is as much about psychology as it is about numbers.

Leading up to an election, media coverage and public opinion can sway market sentiment. This sentiment can lead to sharp movements in stock prices as investors react to the latest poll results, debates, and political developments.

Economic indicators such as the unemployment rate, GDP growth, and inflation are often highlighted during election campaigns.

Candidates use these indicators to bolster their platforms or bash their opponents, leading to increased scrutiny and speculation about the future state of the economy.

It’s a recipe for volatility… and whiplash.

What’s the Story?

I’ve written to you before about how all investors and traders need to use narratives in today’s markets.

If you’ll recall, it’s a strategy that involves understanding and capitalizing on the stories and themes that drive market sentiment. Because while capital moves markets, psychology moves capital.

Here are a few ways to use narratives this election season…

1. Stay Informed: Keep a close watch on the news cycles. Understand the narratives being pushed by each party and candidate’s campaign and how they might impact sectors. For instance, a candidate advocating for renewable energy could boost stocks in the clean energy sector, while another pushing for deregulation might benefit financial stocks.
2. Keep an Eye on Polls and Debates: Polls and debates provide insights into the likely outcome of the election. Analyzing these events can help you anticipate market reactions. For example, a strong debate performance by a pro-business candidate might lead to a rally.
3. Sector Rotation: Different sectors respond differently to political developments. Identify which sectors are likely to benefit or suffer from each candidate’s policies. Position your portfolio to take advantage of these shifts. For instance, healthcare stocks might be volatile if healthcare reform is a major election issue.
4. Use Options: Options can be a powerful tool to hedge against election-related volatility and wager on the ups and downs of specific sectors and stocks. Consider using options strategies such as call spreads and put spreads (my favorite), which allow you to safely and cheaply profit from large price movements regardless of the direction.

But don’t forget the fundamentals.

While narrative trading will be highly effective this election season, it should not replace fundamental analysis. Instead, pair the two strategies.

1. Evaluate Fundamentals: Continue to analyze companies based on their financial health, competitive positioning, and growth prospects. Ensure that your narrative-driven trades are supported by solid fundamentals.
2. Risk Management: Election-driven trades can be volatile. Employ strict risk management techniques, such as setting stop-loss orders and limiting the size of your positions.
3. Long-Term Perspective: Don’t lose sight of your long-term investment goals. While election-driven volatility presents opportunities, it’s essential to maintain a diversified portfolio that aligns with your long-term objectives.

Make no mistake: The looming presidential election will cause volatility in the stock market.

But combining narrative trading with fundamentals will help you navigate this election season profitably.

And in Manward Trading Tactics, my premium newsletter for paid-up subscribers… I show how you can play volatility itself for quick gains… like 247% in 12 days… and 400% in just six days.

Be on the lookout for that later today.

Cheers,

Shah