The Most Expensive Election Trade Ever Made (A Cautionary Tale)

Nov 1, 2024

The U.S. job market took a surprising hit, with only 12,000 jobs added in October. Natural disasters and labor strikes contribute to this slowdown, prompting the Federal Reserve to consider interest rate cuts. Meanwhile, gold is experiencing a resurgence as central banks stockpile it, hinting at geopolitical tensions. The discussion also highlights the dominance of tech giants in the stock market and the lessons traders learned from the 2016 election, underscoring the unpredictability of trading around political events.

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INSIGHT

Gold's Unusual Rally

Gold prices are surging to their highest levels since 1979, despite strong equity markets and declining inflation.
This unusual gold rally signals investor demand for security amid geopolitical uncertainties.

INSIGHT

Central Banks Buy Physical Gold

Central banks, notably in China and India, are buying and storing physical gold, not just gold ETFs or futures.
This shift reflects concern over geopolitical risk and the desire to hold tangible assets immune to sanctions.

INSIGHT

Gold as Inflation Hedge and Safe Haven

Gold acts as a reliable inflation hedge and a safeguard against geopolitical shocks, maintaining value when central banks need it most.
It also has low correlation with stocks and bonds, making it a good portfolio diversifier.

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#554: The U.S. jobs market hit a surprising speed bump in October, adding just 12,000 new jobs — way below the expected 100,000.

A mix of natural disasters and labor unrest explains the slump. Recent hurricanes in the Southeast wiped out somewhere between 40,000 to 70,000 jobs, while strikes at Boeing and other companies added to the slowdown. Against this backdrop, the Federal Reserve looks ready to cut interest rates next week by 0.25 percent.

Meanwhile, gold is having its biggest moment since 1979, but not for reasons you might expect. Central banks, especially in China and India, are loading up on physical gold like never before. Poland's central bank has grabbed 167 tons of gold and wants to keep 20 percent of its reserves in gold — a move that hints at banks preparing for possible global shake-ups.

Remember when I-Bonds were the hot ticket in 2022, paying out 9.6 percent? Those glory days are gone. The new rate has dropped to 3.1 percent, making your standard high-yield savings account look pretty good in comparison.

In the stock market, it's all about the "Magnificent Seven" — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla. These tech giants account for 62 percent of all S&P 500 gains over the past year. The other 493 companies aren't doing too shabby either, with profits expected to grow 13 percent next year.

As for the upcoming election, both presidential candidates' economic plans would push the federal deficit higher. The Wharton School of Business says Trump's proposals would add $5.8 trillion to the deficit over 10 years, while Harris's would add $1.2 trillion. There's also talk about tariffs that could spark inflation and maybe even kick off a global trade war.

Here's the kicker: during the 2016 election, a 24-year-old Sam Bankman-Fried correctly predicted the outcome before anyone else and made $300 million in a single night trading on that information. But by morning, the markets had swung so wildly that he'd lost $600 million.

The lesson? Even if you guess the election right, predicting how markets will react is a whole different ball game — one that you should avoid. Think long-term, buy-and-hold.

Timestamps:

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3:15 October jobs report falls short: only 12,000 new jobs added

7:45 Gold prices surge to 45-year high

11:30 Central banks lead global gold buying spree

16:20 The end of the gold standard

20:45 I-Bond rates plummet from 9.6 to 3.1 percent

24:03 The Magnificent 7 create most S&P 500 gains

28:58 US deficit hits 6 percent, tops G7 countries

33:31 Inflation risks and tariff concerns ahead of election

40:10 Why you shouldn't trade the upcoming election

Resources Mentioned

Wharton’s Trump Campaign Economic Analysis:

https://budgetmodel.wharton.upenn.edu/issues/2024/8/26/trump-campaign-policy-proposals-2024