By Steven M. Sears
On Tuesday, a divided nation voted to elect Donald Trump as America's 47th president. While the nation was focused on politics, the U.S. stock market surged.
The political news -- following media speculation that the outcome would be unknown for days, possibly sparking an armed insurrection -- overshadowed the markets. The disconnect could be considered an example of "inattentional blindness."
The psychological condition occurs when someone is so focused on one thing that they fail to notice something else that should be apparent. Consider the Invisible Gorilla experiment, which tests observational powers with a simple test: counting the number of times two people pass each other a basketball. At some point, a gorilla appears for a few seconds on the screen. Interestingly, about half of test takers fail to notice the gorilla -- much like people who were focused elsewhere than the markets this week.
An American presidential election is the gorilla of global political events. Donald Trump's re-election, coupled with Republican control of the Senate and, possibly, the House, could reshape the world -- not to mention its effect on the trajectory of the U.S. stock market, especially the S&P 500 index, which often behaves like America's third major political party, and on the Federal Reserve's interest-rate policy, to cite two obvious examples.
The Fed is expected to announce a quarter-percent rate cut on Thursday. The decision directly impacts all investors and borrowers, and every business that borrows money and invests.
Interest rates also influence the stock market by lowering the cost of capital needed to buy stocks. A healthy, strong U.S. stock market positively influences the world's economic well-being.
Financial markets have become -- especially in the past four decades -- more than mechanisms that corporations and governments use to finance products or public sewers and roads and airports.
They have become more like society's fifth estate, with a power and impact that often seems to exceed all the others, including political institutions and the media.
Wall Street's mighty captains, more than their predecessors, are politically important. Some, like Cantor Fitzgerald's Howard Lutnick, have significant roles in advising candidates, and many more have held cabinet-level positions. BlackRock's Larry Fink has enormous influence through his exchange-traded fund empire. The list of Wall Street's powerful, cunning grandees is starting to rival history's great statesmen like Otto von Bismarck and Henry Kissinger.
The 18th century markets that aided Europe's rulers are weak shadows of America's 21st century markets, which are intertwined in citizens' affairs through retirement plans and the widespread need to own stocks to pay for life's major expenses, like college and retirement.
Investing doesn't immediately generate feelings of having done something important, like voting for a favorite candidate. But in time -- especially after decades have transpired and returns have compounded -- investment portfolios heavily determine if someone feels whether they made good decisions or not.
Ignore the chaos merchants who are prattling about the consequences of the election. Buy the SPDR S&P 500 exchange-traded fund (ticker: SPY) instead.
If you are comfortable with options, consider selling cash-secured put options that expire in January to hopscotch the political palaver. The strategy positions investors to buy the index at below-market prices.
With the ETF at $586.41, sell the January $570 put for about $7.85. The trade positions investors to buy SPY at an effective price of $562.15 if it is at $570 or below by the January expiration. If the ETF is above the put strike price at expiration, you keep the premium. In either outcome, you win -- which is the opposite of an election outcome.
Email: editors@barrons.com
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(END) Dow Jones Newswires
November 06, 2024 11:01 ET (16:01 GMT)
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