Americans will head to the ballots today to vote for the 47th President of the United States, and most polls are predicting a close race between Republican Donald Trump and Democrat Kamala Harris.
As it stands, markets are currently pricing in a Trump victory, which is expected to bring with it higher tariffs, lower corporate taxes and higher spending growth, among others. Sectors such as traditional energy, defence and technology are expected to be key beneficiaries should Trump triumph. Yet, should Harris prevail, sectors such as clean energy, healthcare and infrastructure, could be expected to benefit instead.
Regardless of who wins the US presidential elections, one thing is for certain — the broader stock market is expected to see a short-term boost. This is due to the “Presidential Cycle” theory, which postulates that there is a predictable pattern of stock market returns after the election of a new US president. The cycle has been studied and referenced by economists and market strategists, where they look at the first year of US presidents in office in an economic and investment context.
“Generally, the stock market tends to do well in this period as [the newly elected President] tries to keep their promises made throughout their campaign trail,” Isaac Lim, chief market strategist of Moomoo Singapore, told The Edge Singapore. “Investors should thus look to gain exposure to the US market, regardless of the election outcome.”
Investors who are unsure about which sectors to look at can invest in the broader market index such as the S&P500 and Nasdaq, Lim adds.
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ETFs or futures?
ETFs are popular among investors seeking exposures to broad market indexes. These include the Vanguard 500 Index Fund (VOO) and the SPDR S&P 500 ETF Trust (SPY) that track the S&P 500, as well as the Invesco QQQ Trust (QQQ) and Fidelity Nasdaq Composite Index ETF (ONEQ) that track the Nasdaq.
More advanced traders could, however, utilise equity index futures, such as CME Group’s Micro E-mini S&P 500 Index Futures and the Micro E-mini Nasdaq-100 Index Futures, for exposure to US indexes.
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These futures contracts offer several advantages compared to ETFs, such as superior liquidity, as well as capital and operational efficiencies for investors to hedge and express their views on their preferred equity index markets, according to Lim.
“For US$10,000 of exposure to the S&P500 via the SPY, an investor will require a capital outlay of the same amount. But an investor utilising the Micro E-mini S&P 500 Index Futures will likely only require less than half the amount,” says Lim.
Moreover, equity index futures provide leverage, as the trader can control a larger position with less capital. Futures are available in different sizes to accommodate the trading needs of different investors, offering the same benefits at smaller contract sizes.
“Using the same example as above, should the S&P 500 move 5% higher, your exposure to the SPY will result in an equivalent 5% gain while the E-mini S&P 500 Index Futures will provide you with an exponential leveraged gain.”
Another key advantage is that futures provide investors with a way to express their short or sell views. Investors do not need to worry about locating stocks in advance, and can easily express their short views at any given time of the day.
Futures are also commonly used to hedge against price fluctuations. Lim explains: “Instead of buying an ETF — which essentially is a basket of stocks, not all of which you have full conviction in — why not buy specific futures contracts to provide hedging risk?” He adds that ETFs usually come with a management fee, expense ratio, or financing cost. Furthermore, ETFs traded in US markets have taxable gains.
So, which instrument should savvy investors utilise? There isn’t a one-size-fits-all approach, according to Lim. From a trading and investing perspective, a savvy investor would not want to purely hold ETFs. Lim recommends making use of index futures and taking advantage of the lack of management fee and financing costs for futures.
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“It really depends on one’s strategy, conviction level, risk appetite and time horizon, among other factors. Options or futures can offer quicker returns for shorter-term traders. ETFs are generally designed for longer-term diversified exposure as an ETF comprises a basket of stocks or indices,” Lim notes. “If there are short-term gains to be made, why not take advantage by using leverage to gain more exposure to the market?”
Alternatively, those invested in the stock market index for the long term that only see a bit of downside risk can sell options on the index through products such as index-based options. “A short-term income strategy is to sell index options while holding the main index. This is a way to protect downside while investing for the longer-term upside,” Lim says.
“Taking everything into consideration, there is no single strategy investors have to follow strictly to position their portfolio, at least for the rest of the year. Investors and traders should consider a multitude of strategies to take advantage of volatility while protecting downside risk, or even to gain short-term profit such as through trading options.”
Beyond the market indexes
Beyond the presidential elections, themes such as the pace of further interest rate cuts and tech earnings are also reasonably expected to affect the movement of investable asset classes, especially in the US market.
Lim believes it is important for savvy investors to remain invested in the US market — even if one looks beyond the typical market indexes.
The cost of staying on the sidelines can be a prohibitive one, particularly with inflation set to stay elevated for longer. Over time, the value of uninvested money erodes, says Lim. The opportunity cost of staying uninvested may become overbearing as it compounds. Savvy investors should explore the various investable asset classes, based on their risk and return profile, and not expect money sitting at home or their bank accounts to be sufficient to combat inflation.
Multiple statistical studies show that the US stock market tends to stay in an uptrend over the long term. Given this, Lim recommends investors to stay invested in the US stock market. Interest rates are also an important theme over the past two years, where investors may consider investing in real estate in anticipation of lower rates.
“Investors should be careful when considering interest rates, as inflation is still sticky despite the Federal Reserve [Fed] cutting interest rates. Over the past few weeks, we are starting to see an uptick in US 10-year yields from around 3.6% to around the 4.2% level currently,” Lim says. He suggests that US treasuries should still be considered as part of an investor’s portfolio, but to reduce exposure in light of Fed chair Jerome Powell seeing further cuts on the horizon leading into 2025.
Gold and silver still precious
Looking at commodities, gold is up over 30% year-to-date. Since February 2024, gold has been reaching an all-time high every month. Lim explains the reasons behind the gold rally: “At the start of the year, there were many reports suggesting that the Chinese government was buying and accumulating physical gold.” Now, the leading narrative has shifted to lower interest rates and risk events that increase volatility in markets. “As interest rates come off, gold as a precious metal does not fluctuate as much as interest-rate related products over the shorter term, and is seen as a better store of value,” Lim explains. Furthermore, as risk events increase volatility in markets, gold is viewed as a safe haven for investors.
Silver, on the other hand, has just seen a decade-high. Although silver has not been making monthly highs, it is still worth considering as an investment. “Comparing silver and gold prices, silver generally plays catch-up to gold prices, and investors can play this relationship by buying into silver futures,” Lim suggests. Investors should consider finding exposure to more precious metals like gold and silver, at least during this quarter.
The trend is your friend until it ends
As a savvy trader, you can use options to take advantage of shorter-term movements in the market. Lim advises: “If you’re a short-term trader, you should have a pool of capital allocated to a long-term strategic portfolio. If you’re holding gold and silver for the long term, you could sell covered calls, options on gold ETFs, or gold index options to collect premiums — potentially enhancing income over the short term.”
If investors see increased volatility over the short term, they should consider trading VIX options. Options are a leveraged derivative which allows investors to control a larger position size with less capital. It should be noted that it is riskier trading shorter term with increased volatility in the markets. For more experienced traders, Lim suggests taking advantage of short-term movements and swings in the market during periods of increased volatility. Despite the short-term fluctuations of the US market, a savvy investor should consider the longer-term picture. “Don't miss the forest for the trees. With every market correction, there will come a time where the market recovers and continues to stay on an uptrend.”
Advice for 2024
“If investors ask how to approach the market for the rest of 2024, I would suggest staying invested in the US stock market over the longer term while trading options over the shorter term to enhance income and reduce downside risk. Although investors should stay invested in bonds, they should consider reducing exposure and allocate more to silver and gold,” Lim advises.
Savvy investors and traders should learn to use tools such as index futures and index options to optimise and reduce leakages for their portfolios. If they wish to trade index options for the US stock market, for example, they could consider using CME’s equity index options.
