Trading Based on Political News: A High-Risk, High-Reward Game

"This is a man's world," cries James Brown. It's one of Donald Trump's favorite songs. He plays it along with his favorites from Sinatra while out on the golf course. It's no surprise why he likes it, if you're familiar with the lyrics -- after all, Trump loves to build things, and he loves women.

Since Trump entered the political arena, he's also built a high-stakes world of politics, adding to the normal political landscape in such a way that it's become more or less political theatre. And this has spilled over into the world of investing in the stock market. In the years since Trump was first elected, even the simplest of tweets have been able to rock the investing world, causing volatility in an otherwise steady market. Couple that with the scrutiny of congressional politicians capitalizing on investment opportunities based on their inside information, and you've got the Wild West of the political investment world.

In this post, we'll take a look at the details behind the popular Trump trades in the stock market and touch on how politics impact trading. We'll even cover some of the biggest trades politicians make in the stock market, letting you decide whether or not they are privileged deals and how you might capitalize on these political stock trades.

The Impact of Political Events on Investments

It is no surprise that news events affect the stock market. Any seasoned trader knows the impact war, famine, or corporate news can have on individual stocks or the market as a whole. Anyone who lived through the COVID-19 pandemic that began in 2020 likely remembers the "COVID Crash" that occurred in the market that year, followed by one of the longest and most aggressive bull markets the market has ever seen. We've got a chart to show you below. If events like this can affect the market, so can politics. 

Political Events and Market Volatility

Every four years we have a presidential election in the US. These can be times of uncertainty for many investors. During times of uncertainty, investors may park their assets in "safer" places like gold or government bonds, assuming these are less risky than equities. As a result, you may see the stock market weaken during these periods, increasing volatility as investors flee to the hills while they watch the election play out.

Market Responses to Political Announcements

Other political events can create short-term volatility in the markets. Just as a speech by Jerome Powell, the Fed Chair, creates volatility, a speech from the president can do the same to markets, depending on what is discussed. For example, if war is announced, or new taxation is talked about, markets could swing in either direction based on the implication of the news. Military stocks might soar in such a scenario. 

Similarly, if politicians discuss tariffs or legislation to limit certain industries, it could put a burden on those companies in the stock market. One example is the marijuana industry. Tightening the federal rules and regulations on such an industry could have a devastating effect on companies that produce, process, or sell marijuana.

Market responses are not always what investors expect. Many times you might see markets make a run leading up to an announcement, then crash the moment the announcement is made. If the market is anticipating policy changes, it could go in either direction before the actual announcement, and then go in the opposite direction afterward. 

For the reason of uncertainty, it is imperative to employ a solid risk management plan during heightened political news events and seasons, like election years.

Which Political Party Leads to Higher Markets?

Technically speaking, over time there isn't much of a correlation between stock market performance and the party affiliation of the sitting president. All things considered, the first year after an election typically trends lower, but that often changes throughout a four- or eight-year period, depending on if the incumbent gets reelected. And the difference between reelecting the incumbent or electing a new president only affects the market with about a 1.5% change on average.  

Surprise Events in Politics

Surprising events in politics can also introduce uncertainty to the economic outlook, affecting investor behavior. One recent example was the assassination attempt of President Trump. This led to a shocking increase in his media company, the ticker symbol DJT. It also marked a top in the indices. We'll discuss more about this in the Trump Trade below.

Analyzing Election Stocks

Election time can bode well for savvy investors who are aware of the type of companies that could benefit from an election. History can shed a little light on how the market has performed during election cycles and the type of investing you could benefit from.

For example, according to jpost.com the average return for the S&P500 from 1928 to 2016 during presidential election years was around 11.3%. If you want to dive into the analytics of Democrat vs Republican presidents, you'll find that the average S&P gain for Republicans lands around 15.3%, while Democrats see around a 7.6% increase in the S&P.

The worst election year was 2008, with a return of -37%. The best presidential election year was 1928 when the stock market gained a whopping 43.6% return. Obviously, coming out of the Great Depression and the sub-prime mortgage debacle had a lot to do with either of these.

Presidential Election Cycle Theory

There is a theory, a bit of a heuristic, that markets tend to follow during presidential cycles. Considering what happens to the stock market over a broader range, like a four-year presidency, we can generalize what the market will do based on historical averages.

• 1st Year of Presidency: Markets can experience a dip based on new policies and reforms
  
  
• 2nd Year of Presidency (Midterm): Most often a positive year for stocks as the political climate settles
  
  
• 3rd Year of Presidency: Again, stocks tend to do well. Could this be optimism leading into an election year?
  
  
• 4th Year of Presidency (Election Year): Hear we are again. Volatility may return to markets due to the uncertainty of the election, campaign promises, or other surprises (like assassination attempts).

Potential Sectors and Industries Affected by Election Periods

Certain industries and sectors may be affected more than others during election cycles. This could be an evolving list, too, depending on the narratives and perceived policy changes coming down the pipe. For example:

• Marijuana stocks could rise or fall depending on a candidate's rhetoric concerning the sector's regulation. If the candidate has shown to be tough on legislating or prosecuting marijuana cases in the past, the markets could perceive this as a loss for that industry.
  
  
• Pharmaceutical stocks could take a hit if a candidate touts his ability to decrease drug costs and supports generic drug manufacturers. 
  
  
• Infrastructure-related stocks could soar if a candidate proposes new legislation and spending for roads and bridges or other infrastructure-related projects.
  
  
• Military-related stocks like Northrop Grumman and Boeing could rise or fall based on the hawkish nature of a candidate and their history of going to war or not.

Several sectors and industries can be affected by political commentary and leanings. It's up to investors to do their research, remain cautious, and consider the short- and long-term implications of global trends and economic forecasts based on either party's candidate.

The Trump Trade and Its Affect on the Stock Market

The "Trump Trade" was coined after his first election in 2016. Known as an austere businessman, Trump favors a pro-business economic environment. This type of climate consists of key elements that deregulate businesses and corporations, provide tax cuts for businesses and individuals, and increase infrastructure project spending.

Anticipating a Trump win in November would be anticipating that corporations who would benefit from his policies will also win in the stock market. When Trump won in 2016, U.S. stocks surged along with the dollar and Treasury bills. Tech and Financial sectors boomed. There are some forecasts that a Trump presidency will benefit banks and oil companies if he wins a second term.

There are also inherent risks involved with the Trump Trade. Here are just a few to consider:

1. Trade Tensions: Trump's strong stance against China and other countries could escalate a tariff war or set off a crisis with global supply chains.

2. Volatility: Trump knows how to rile the markets. If his first presidency was any indication, a simple tweet can send the markets into a maelstrom. Get ready for round two.

3. Debt and Deficits: Trump is no enemy to debt. He is famously known for using massive amounts of debt to his advantage in the real estate world. We'll see if he can wrangle the ever-growing deficit the country faces despite his desire for growth.

4. Geopolitical Uncertainty: While the last Trump presidency was relatively peaceful worldwide, he is known for taking an unconventional approach to foreign policy through sanctions and threats. These can backfire on markets depending on the association with foreign countries.

Whether Trump gets elected in 2024 is yet to be determined. Regardless, there are always risks in the market. Be sure to speak to your financial advisor before going headlong on a Trump Trade idea.

The Donald J Trump Media Trade aka DJT

Trump commissioned a company called the Donald J. Trump Media & Technology Group Corp in 2021. (DJT). It trades on the NASDAQ. Founded in 2021 by Andy Litinsky and Wes Moss, Trump is a primary owner. Up until March 26, 2024, DJT traded under the DWAC symbol, a special purpose acquisition company called Digital World Acquisition Corp. This was a popular trading vehicle after the pandemic of 2021 when it first announced its partnership with Trump.

Despite its lackluster performance in the market, DJT has acted much like a meme stock. If you're familiar with names like Gamestop and AMC, you'll understand. If not, we've covered meme stocks in great detail on the Tradinsim blog. Suffice it to say, DJT often experiences random and violent swings in price based on Donald Trump news, despite that he is no longer tweeting on X.

For example, the Monday after Trump survived his assassination attempt at a rally in Pennsylvania, the symbol DJT spiked over $15 in the premarket. It eventually sold off again, as the underlying financials are likely mediocre, but the news was the impetus for momentum day traders to give it a good push. You can see the news-related spikes below:

Nancy Pelosi's and Other Congress Member Trades

The spike in interest in trading the markets during Covid uncovered some unusual trading activity for members of Congress. A service on X known as Unusual Whales created a website that aggregates the public data for the trading activity of members of Congress. As such, it brought scrutiny on the trades of prominent figures like Nancy Pelosi and others. 

According to Unusual Whales, Pelosi's trades had a high rate of success. So much so that he regularly posts the following information regarding the win rates of congress members:

Whether you agree or disagree with politically motivated stock trades, one thing is for sure, politicians appear to have a solid win rate. Pelosi herself is making a mint in certain stocks and options in 2024. To track her trades there are quite a few options on X besides just Unusual Whales. One account has made it their sole focus to track Pelosi's portfolio:

We are in no way advocating for following her trades without doing your research, nor are we advertising using these tools to do so. However, politicians have a vested interest in making money in the stock market. Doing research on their trades and the impact that politics has on stocks is a worthwhile study in itself. You never know, it could lead you to profitable trade ideas if you manage risk properly.

How Can Tradingsim Help?

Tradingsim offers a 24/7 trading simulator that allows you to study the trades of politicians, go back in time to revisit new related events, and track your trades. There is no better way to train your chart eye in the stock market than through a realistic replay of the markets with virtual money. It is hands down the safest and most realistic training device on the market. But don't take our word for it, give it a free try for yourself.