Conflicting Signals Abound

Dear subscriber,

Turn off the news... ignore social media... take a deep breath... and let's look at some facts together... starting with a story about a man named Art Cashin.

Cashin worked in the order room of a small brokerage firm in New York in the 1960s. He knew something was up when he got a call from one of his floor brokers, "Is there anything out about the president?"

When Cashin asked him what he was talking about, his floor broker explained that "there was a sudden burst of selling and that most of it seemed to come from one brokerage firm and that one of their brokers said it had something to do with the president."

The day was November 22, 1963. And that brokerage firm was based in Dallas, where then-President John F. Kennedy had just been shot.

As the New York Stock Exchange later wrote, "The intensity of the 27-minute sell-off that afternoon has never been matched."

News traveled slower those days. But according to lore, the market started dropping before the news even hit the wires. The Dow Jones Industrial Average fell 2.9% that day.

Harm to a president has historically been bad for markets.

It was a similar story on September 26, 1955, after then-President Dwight D. Eisenhower suffered a heart attack... The Dow dropped 5.7% in a single day.

But times have changed since then.

This past Saturday, at a campaign rally in Butler, Pennsylvania, there was an assassination attempt on former President Donald Trump.

And instead of the selling that typically follows such an event... markets shrugged off the news. Two days later, U.S. stocks reached new highs.

Most of the time, markets are driven by business. As investors, that's our preference.

But four months out from a consequential election, we find ourselves traipsing through the swamp of politics.

The attempted assassination on Trump is one of those stories that consumes the news. You may have spent the entire week reading speculative pieces about the shooter's motive, reviewing schematics of the security failures, or scouring treatises about "what this all means."

We'll stick to markets.

Don't interpret the recent rally in stocks as a cheer for Trump's misfortune. It's the opposite. The consensus view is that the attempt on Trump's life improved his chances of reelection.

An assassination attempt can boost politicians' standings. After the attempt on President Ronald Reagan's life in 1981, his approval rating jumped 13 points overnight.

And Trump's immediate reaction – a raised fist of defiance – likely won him some converts.

Depending on which venue you check, betting markets show Trump's likelihood of reelection soaring from around 55% to 70%.

It's clear now that the stock market is in favor of a Trump reelection. The S&P 500 rallied in the days after the shooting while the odds of a Trump reelection continued to climb. (We saw even bigger moves from small-cap stocks, which we'll talk about in a moment.)

The same thing happened after President Joe Biden's disastrous debate performance in June... The odds of a Trump reelection seemed more likely, and stocks rose nearly 3% in eight trading days.

When things look good for Trump, the market rallies.

But questions remain... Other U.S. leaders have survived attempts on their life and didn't get a boost in the polls or approval ratings.

Theodore Roosevelt, for instance, was shot while campaigning in Milwaukee in 1912. He even continued his speech after the attempt, with the bullet still in him. But he went on to lose the race to Woodrow Wilson.

Gerald Ford dodged two separate assassination attempts within a month... and his approval rating remained unchanged.

In the case of Trump, betting markets may have moved, but the polls haven't.

We collected polling data from reputable market-research and business-intelligence companies HarrisX, Morning Consult, and Ipsos, as well as Emerson College Polling.

The following results were conducted in the days after the shooting. And none of them show movement in Trump's favor, though he still leads the national average by 2% to 3%.

Biden, of course, has his own troubles. Though he seems to not realize it.

Voters are either so entrenched by the chaos, or so disillusioned by both candidates, that even dramatic political violence doesn't move the needle.

When you look for evidence to explain these chaotic times, you find just as much chaos in the data.

In fact, it may be the Trump news that's continuing the rotation from large caps to small caps...

Over the broad sweep of history, small caps have typically outperformed large-cap stocks. But the past decade has seen large caps do better.

That trend has re-reversed, so to speak, over the past two weeks. Small caps are now leading the way.

You can see how dramatic this rotation is by looking at the ratio of the S&P 100 Index (which tracks the 100 largest stocks in the market) to the small-cap Russell 2000 Index...

So markets like Trump. His reelection looks more certain. Trump will be more business friendly. Therefore, investors are willing to take on more risk and move more capital into small caps.

But again, the data brings chaos...

In the bond market, the ratio of the spread on C-rated junk bonds compared with the spread on BBB-rated investment-grade bonds is the highest it has been in 20 years.

And it hasn't come down with the recent rally...

In other words, investors are willing to take on more risk in small caps, but they aren't willing to take on more risk with junk bonds.

The common wisdom in markets says that the bond market is smarter than the stock market, which would make me cautious of the recent small-cap rally.

We'll keep watching to see which market follows which... and will update you every step of the way.

What Our Experts Are Reading and Sharing...

The market is pricing Trump as the "business friendly" option... but not for all businesses. According to the Financial Times, semiconductor stocks are down after comments from the former president rattled investors. While both parties want to be tougher on China in the chip market, Trump stated that Taiwan – a global leader in chipmaking – should pay for its own defense. This quickly wiped $496 billion from the Philadelphia Semiconductor Index.

This week in the Stansberry Digest, Corey McLaughlin explained how the surge in small caps signifies a "rotation"... and how that's bullish for the overall market. But it doesn't paint a good picture for the mega-cap tech stocks.

Most crashes come as a surprise, but everyone has expected commercial real estate to crash since the pandemic. Now, it's happening in slow motion. According to the Wall Street Journal, stress in the real estate market is finally starting to hit the bond market. As it stated in a recent article, "Bonds are getting hit now because debt is coming due on properties that were able to limp along for years."

New Research in the Stansberry Investor Suite...

Speaking of geopolitics, this week, Stansberry Investor Suite subscribers will get a new issue from Stansberry Innovations Report.

The Innovations team details why our next president – whoever that may be – will inherit an unstable world order...

Tensions are high between the U.S. and rivals Russia and China. The Middle East has plunged back into war. And those are just the known conflicts. (Geopolitics has a way of surprising you with new problems.)

And despite our record $825 billion defense budget, U.S. defense spending as a percentage of our gross domestic product ("GDP") is at a historic low...

Increasing geopolitical tensions and low defense spending don't match. And the global threats won't be going away.

In a rare agreement, both parties intend to raise defense spending in the next term. That's why the Innovations team is adding another defense stalwart to their model portfolio...

In this month's Innovations issue, they do a deep dive into the defense space. They get into helicopter engineering... ceramic coatings... the F-35 fighter jet's cooling system... and the defense company that's at the forefront of aerospace innovation.

This effort was a collaboration between the Innovations team, which includes John Engel, Eric Wade, and Andrew McGuirk, and our resident experts on the defense sector, Dave Lashmet and Erica Saint Clair.

As a Stansberry Investor Suite subscriber, you can see their latest recommendation by clicking here.

And this isn't one of the stocks that comes to mind when you think about defense. (It's not Lockheed Martin, Northrop Grumman, or General Dynamics.) So be sure to read the issue to see our favorite play in defense today.

Until next week,

Matt Weinschenk
Director of Research