Go long America.
The country has problems, but many pundits are unduly influenced by their political views when they explain why the S&P 500 index is lagging behind some international benchmarks. It's best to ignore them.
The performance gap is a fact, as are President Donald Trump's polarizing policies. Yet some major investors are wagering against the "fall of America" narrative and are trading options in the over-the-counter market in anticipation that the S&P 500 reaches 8000 in a year or so. (It's just under 7000 now.)
The OTC market is operated by banks for wealthy customers who want to privately express their views, or who employ strategies that are difficult to complete in normal markets.
These bullish investors are trading call-option spreads on the S&P 500, picking strike prices just above and below 8000 and then leveraging the positions anywhere from 10 to 20 times. Banks are hedging the trades with similar call spreads with wider strike prices. (Calls give the holder the right to buy an asset at a set price and time.)
Anyone who agrees that the S&P 500 could cross 8000 can mimic the private-market trades by trading options on the State Street SPDR S&P 500 exchange-traded fund (ticker: SPY). Though we prefer short-dated options that can be adjusted to reflect market realities, in this case we would opt for a January 2027 expiration date to provide time for the index to hit a record high.
With the SPDR S&P 500 at $689.44, bullish investors could buy the January $790 call that expires in 2027 and sell the January $810 call with the same expiration date. The spread costs about $3.85 and is worth a maximum of $16.15 if SPY is at $810 at expiration. If it fails to advance as anticipated, this trade fails.
Think of it as a cost-effective way to speculate on a massive market advance while limiting the money you have at risk.
So far this year, the ETF is up 1.1%. During the past 52 weeks, it has ranged from $481.80 to $697.84.
The bullish S&P 500 trades are a rebuke to the chattering class that is predicting the end of U.S. hegemony and citing the outperformance of various international benchmark indexes, and a weak U.S. dollar, as evidence that financial markets are wagering on the end of American exceptionalism.
They are predicated on something more than patriotism. Corporate earnings are growing, and profit margins are stable and often expanding -- and that usually presages higher stock prices.
That reasoning will be repeatedly tested. The January 2027 expiration covers several earnings seasons, countless economic reports, and seven meetings of the Federal Reserve's interest-rate-setting committee.
If the Fed lowers interest rates -- a reasonable expectation despite present concerns about inflation -- stock prices would have another reason to rally.
Trading patterns have become politicized during Trump's second term in ways that have rarely been experienced in recent decades. Advisors have shared with us that both conservative and liberal clients are making investment decisions in reaction to how they view Trump's policies.
The issue still isn't well understood, but history favors the S&P 500. The iShares MSCI Emerging Markets ETF is outperforming the SPDR S&P 500 ETF this year, as it did last year. Still, SPY has outperformed EEM over the past three-, five-, and 10-year periods.
The past isn't indicative of the future, naturally, but it helps to assess the future.
Let others conflate U.S. stock trading with political leanings. Instead, try profiting from the disagreement and seek to monetize the sage advice of Anselm Rothschild, who, in another politically charged era, said to take things as they are and profit off the folly of the world.
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