The Top Election-Related Trade to Make This Year (and Always)

We're getting down to crunch time... What the election outcome could mean for stocks... 2016 proved to be a trader's paradise... A few ways to profit from this tradeable event... The top election-related trade to make this year (and always)...

It's impossible to ignore the upcoming presidential election...

So I (Dan Ferris) won't even try to do that in today's Digest.

As you know, we're getting down to crunch time...

Millions of Americans will go to the polls on November 3 – if they haven't already mailed in their ballots or voted early, of course. That's just 11 days from now. And last night, President Donald Trump and former Vice President Joe Biden squared off in the final debate.

Not that it actually meant anything...

We all know that what played out on the stage at Belmont University in Tennessee won't change anyone's minds. Trump supporters will still vote for Trump... Biden supporters will still vote for Biden... and if you're still undecided on who to pick, well, good luck!

In the end, though, maybe the winner is irrelevant...

Today, we'll look at what we can learn from history about whether it matters who's in power or not. And as regular Digest readers know, I've also said elections are tradeable events, so we'll also get into some trades you can make to profit in the coming months...

First, let's mull the election outcome a little bit...

Opinion polls and Las Vegas oddsmakers show Joe Biden is more likely to become the 46th U.S. president than Trump is to remain in the role. And they also say it's more likely that Democrats will win the House of Representatives and Senate than Republicans.

However, I don't believe anybody knows the future... And if one person has taught us about his ability to surprise the hell out of everyone, it's Trump.

But does it really matter whether Democrats or Republicans are in the White House and holding a majority in Congress?

My colleague Corey McLaughlin touched on this topic a month ago – in the September 23 Digest. However, I want to take it a step further today, and I bet this will surprise you...

Now, it's easy to determine that the stock market has done better, on average, during Democratic administrations than it has during Republican ones. Historical data from 1926 through 2019 shows U.S. stocks have outperformed by an average of roughly 5% per year during Democratic administrations, compared to Republican administrations.

I wish it were that simple, but my "spidey sense" tingles when I hear the word "average."

A 6-foot man can drown while walking through a river with an average depth of three feet, after all... And an investor can lose a lot of money betting on an average outcome. (Author Sam Savage wrote a good book about this and other common risk-management mistakes called, The Flaw of Averages.)

For example, the two best-performing administrations in history were both Republicans – Calvin Coolidge and Gerald Ford. It's true that the worst-performing administration was also a Republican... But it was Herbert Hoover, who served as president when the Great Depression started – right after the bursting of an enormous bubble.

A more important statistic might be what happens in 'unified' administrations (the surprise I mentioned)...

That's when a single party controls the White House and both houses of Congress.

Under these scenarios, the numbers are almost eerie... According to analyst Bob French at McLean Asset Management, U.S. stocks rose an average of 14.52% per year during unified administrations – no matter which party was in control.

If I had to guess why this is true, I'd say the market loves the predictability of having one party in charge of both the executive and legislative branches of the federal government.

Regardless, if the polls and oddsmakers are right and we wind up with a "blue wave" government in a couple of weeks... and if the 2020 election rhymes with the average historical outcome... returns in U.S. equities could be quite good for the next four years.

However, a critical reading of the data and my gut leave me skeptical that the outcome of this year's presidential and congressional elections mean much for investors over the longer term. As I said earlier, elections aren't investable... They're tradeable.

The night of the November 2016 election proved to be a trader's paradise, for example...

I stayed up late, watching the futures markets and election results.

Futures for the benchmark S&P 500 Index melted down about 5% as it became clear Trump was winning states everybody thought Democratic nominee Hillary Clinton would win. Likewise, the Mexican peso futures melted down 10% or so (if memory serves)... since everyone knew Trump didn't like the North American Free Trade Agreement and wanted to renegotiate the agreement.

By the next morning, though, the S&P 500 losses were gone... I remember someone posting on Twitter: "Best. Crisis. Ever."

Some longer-term trades worked around the 2016 election, too...

For example, steelmaker U.S. Steel (X) rose 162% from September 16, 2016, through February 21, 2017, apparently because investors anticipated that Trump would keep his campaign promise to engage in a tariff war with other steel-producing countries.

But steel is a highly cyclical business... and the stock has been very volatile since then. Again, it was a speculative trade, not an investment.

It all begs the question – What's a good 2020 election-related trade?

I have some ideas to consider, all of which fall into the category of longer-term trades – playing out over the next six to 12 months...

The first one comes from my Stansberry Research colleague and fellow motorsports enthusiast Thomas Carroll. We talked about this idea during our interview on this week's episode of the Stansberry Investor Hour podcast.

As regular Digest readers know, Thomas is the editor of our Cannabis Capitalist research service. And frankly, he's also one of the best health care equity analysts on planet Earth...

Before joining Stansberry Research in early 2019, Thomas worked for nearly two decades at big Wall Street firms like Legg Mason and Stifel Financial. Fortune magazine once ranked him as the No. 1 health care analyst in the U.S.

Thomas is our resident cannabis guru these days. I've never met anyone who understands that market better. So I asked him for some election-related insight about cannabis...

If you read our Masters Series essays a couple of weeks ago, you know he believes both candidates will get behind legislation to legalize cannabis at the federal level if they win. At the same time, he explained that a combined win for Biden and the Democrats in the White House and Congress would likely accelerate the process.

During our interview, Thomas echoed a point that he made in the Masters Series on October 10...

I would say we are within months, not years, of some type of meaningful federal legislation.

Wow... Months, not years. I like the sound of that!

As Thomas noted, cannabis stocks will ratchet up hard on the day when any type of announcement is made about a bill or law to set the federal legalization process in motion. So now is the time to get involved in the space if you're not already.

You see, cannabis is legal for recreational use in many states... But it's still an illegal, "Schedule 1" narcotic at the federal level – putting it in the same class as heroin, ecstasy, LSD, and other drugs that are deemed addictive and of no legitimate medical use.

Companies that sell cannabis products – even in states where it's now legal – wind up doing all their business in cash because the banking system won't recognize them as long as the feds say it's illegal. Once all this nonsense is fixed by federal legislation, the industry will have fewer barriers to growth.

Thomas shared one of his favorite stock ideas with us on the Investor Hour podcast... and he believes the returns in the cannabis sector in general will be very good over the next one to two years... perhaps starting even sooner.

I'd expect a sweep from the Democrats to send cannabis stocks moving higher... And a federal legalization bill would really kick them into another gear. Since Thomas believes this is happening in a matter of months, not years, I'm betting that this is a trade for the next 12 months or less... and that you'll make great money by November 2021, if not before.

That makes "buy cannabis stocks" my No. 1 election-related trade.

Given that cannabis is a highly speculative, early-stage venture today, you could easily see multibagger gains in the space – if you pick the right stocks. But remember, since it's highly speculative, it comes with a lot of risk, too... so it's not a trade to make with your "rent money."

And of course, you want an experienced guide leading you along the way. That's why I encourage you to learn more about Thomas and Cannabis Capitalist...

Earlier this month, he put together a brand-new presentation to help everyday investors get ahead of a major shift leading up to the election. You can still watch it for free right here.

Another election-related trade seems to be developing in bitcoin...

But before we get to those details, let's address the good news that occurred for bitcoin earlier this week...

Online-payments provider PayPal (PYPL) announced on Wednesday that it will launch a new service so its customers can buy and sell bitcoin and a few other cryptocurrencies directly from their accounts.

PayPal's new service will also make it possible to use cryptocurrencies to pay for goods and services at 26 million merchants worldwide. It's expected to be up and running in early 2021.

So if you're crypto-curious but don't feel like opening a Coinbase account (which is no hassle at all), buying and using cryptos is about to get as easy as buying anything else online.

Bitcoin has risen nearly 6% since PayPal's announcement on Wednesday morning. It's up roughly 80% from the beginning of this year through today, as we go to press.

With a market cap of about $238 billion right now, bitcoin is by far the largest cryptocurrency in existence. It's more than five times bigger than Ethereum, the next largest crypto, with a current market cap of around $46 billion.

Now, why is bitcoin an election-related trade?

First, bitcoin was already up about 13% this month when the PayPal news broke on Wednesday. So somebody was already buying. Maybe they knew the PayPal news was coming... Or maybe they were thinking a little longer term about the upcoming election.

Once the election is behind us, the (maybe new) president will be very interested in doing all he can to help the U.S. economy recover from the heavy-handed COVID-19 shutdowns...

That'll likely mean more stimulus programs – and ultimately, more U.S. dollars printed to buy more U.S. debt securities.

As I've mentioned before, that alone isn't enough to cause inflation... When the Federal Reserve buys debt securities, it increases bank reserves, providing more capital for lending. But inflation doesn't happen until that money is lent and spent. If it just sits there, you'll get no demand for goods and services pushing up prices... and no observable inflation.

The Fed knows this, and its members are probably sitting around trying to think of ways to make borrowing and spending more attractive to more people and businesses.

So what if the Fed does for corporate lending what the government-sponsored agencies Fannie Mae and Freddie Mac did for home loans?

Fannie and Freddie were created by Congress to buy home mortgages from banks, allowing them to turn around and make more loans. They also package them into mortgage securities, sell them to investors, and – here's the important part – guarantee the payment of interest and principal!

In other words... if you hold a Fannie- or Freddie-backed mortgage, your interest and principal are guaranteed if the homeowner can't pay.

Not bad, right?

Now imagine if the Fed started buying, selling, and – most important of all – guaranteeing corporate loans... just like Fannie and Freddie do for home loans. (Hat tip to Porter for mentioning this idea at our virtual Stansberry Conference and Alliance Meeting earlier this month.)

Investors and institutions would start lending like crazy...

Once they got done with all the creditworthy borrowers, they would lend to companies that desperately want to borrow but can't because nobody will lend to them.

Remember the so-called "NINJA loans" during the housing boom? (NINJA meant the borrower had no income, no job, and no assets.) We could see something very similar if it plays out this way.

As I pointed out in my Stansberry Conference presentation a few weeks ago, there are more so-called "zombie" companies around today than ever before. They're companies that must get some type of loan or other bailout to stay alive. If the Fed starts backing corporate loans, the zombies will come to life en masse. (Insert your own zombie joke here... 2020 has been a wild year, after all.)

With all the new lending will come much new borrowing... much new spending... and finally, rising prices, indicating inflation.

I believe the impending election will serve as the catalyst... And the market will continue to respond with higher bitcoin prices.

I've always believed bitcoin has dramatically more upside than gold...

I've never said gold has 100-bagger potential. But since my initial recommendation of bitcoin back in February, I've said many times that it has 100-bagger potential.

Why?

Because there are tens and tens of trillions of dollars, euros, and yen in the world. Central banks can print as much of those fiat currencies as they want... But there will never be more than 21 million bitcoin in the world, and that won't happen until 2140 under the current protocol.

So bitcoin is a much harder currency than the world's fiat currencies, and everyone is starting to figure that out. That realization combined with more general acceptance – like the recent PayPal announcement – are pushing bitcoin higher as the election draws nearer.

So "buy bitcoin" is my second election-related trade.

And similar to my advice to follow Thomas for his cannabis-related expertise, you should consider checking out Crypto Capital editor Eric Wade's analysis of this space. Not only will Eric help you with bitcoin, he'll also pinpoint the best little-known cryptos to buy right now.

Eric recently joined Porter to talk about cryptos during our "Capitalism in Crisis" event. And as part of that presentation, they're offering access to Crypto Capital at 50% off the regular price. So if you haven't watched this presentation yet, I encourage you to do so right here.

Pot and bitcoin... I'm starting to sound like an anarchist – which isn't far from the truth. (We'll talk about that another day.)

I've thought about another possible trade, but it looks riskier than the first two...

Of course, since they relate to the election and its never-say-never outcome, it's worth noting that these are all speculations... not investments into which you should dump your life savings. But when it comes to this more risky trade possibility...

If Biden gets elected, gun and ammunition stocks might continue to do well. That's what happened after Democrat nominee Barack Obama was elected as president in 2008...

The share price of gun maker Sturm, Ruger (RGR) bottomed at below $5 in late-November 2008, after Obama was elected earlier in the month. The stock peaked just pennies shy of $85 per share – an incredible 1,600% rise – in January 2014. Then, it mostly went down or sideways until the COVID-19 pandemic sent it to new all-time highs this past August.

Will we get another stellar five-year run out of a unified Democratic White House and Congress this time?

I don't know... But seeing Ruger more than double off its March bottom, then fall as much as 32% off its August high sure makes me shy about betting on it right now.

Gun maker Smith & Wesson Brands (SWBI) and ammo maker Vista Outdoor (VSTO) have outperformed Ruger both on the upside and the downside this year... So they're even less appealing to me as a trade on a new "blue wave" gun boom. (Ruger outperformed Smith & Wesson during the Obama gun boom, and Vista wasn't a public company until 2015.)

Another thing to keep in mind... These gun stocks were much cheaper back in 2008, as the financial crisis punished just about every equity in existence. They're not that cheap today.

No matter what the gun stocks do, one thing is certain... I will keep buying and stockpiling ammo (and maybe another gun or two) until it's near impossible to get. I might buy an AR-15, too... since Democrats seem obsessively focused on that particular weapon and have frequently threatened to ban them.

Maybe that's the trade... Maybe we should stock up on ammo in case we need to use it as currency – or to defend ourselves if the most paranoid among us turn out to be right and we really should move to New Zealand if one or the other candidate gets elected.

Electric-vehicle ('EV') stocks are another favorite of folks who believe in a Democratic sweep...

EV companies are mostly terrible businesses, some with zero revenue. And over the past year, they've already had a killer run that's starting to show signs of weakening...

Of course, the poster child for this trend is Tesla (TSLA), which started the year at a split-adjusted $84 per share. The stock rose to nearly $500 per share in late August, fell as low as $330 about a week later, and then soon returned to its present level of around $425 per share.

That's a wild ride. And as we've said before, there's simply too much to be worried about...

Tesla's market cap is more than two times bigger than Toyota Motor's (TM) even though Toyota makes roughly 25 times as many cars in a year as Tesla. Toyota also makes a profit, while Tesla doesn't.

There's an enormous amount of competition in the EV market from several carmakers that know how to make a profit selling cars... There's the simple fact that it's a low-margin, capital-intensive business, making it inherently unattractive for anything but short-term speculation... And of course, there are questions about Tesla's management – like whether or not CEO Elon Musk is "high" at any given moment.

In light of all this, Tesla strikes me as the type of stock that could fall 50% or so in a single day. It's too risky for me... But if you like it, I wish you good luck. You'll need it!

During the virtual Stansberry Conference a few weeks ago, I explained that investing is personal...

And I said that folks should think about owning assets that I would classify as "non-traditional."

For example, several years ago, I met a man who said he had a portion of his retirement invested in vintage Gibson and Fender guitars. From our conversation, I could tell that he knew a lot about them.

If that man is still alive today and hasn't sold them yet, I'm sure he has made a fortune.

Another fellow I read about in a recent Bloomberg article invested some of his money into whisky in casks in a warehouse in Scotland. He and his wife enjoy the alcoholic beverage... and according to the Bloomberg article, he also has made some money on the investment this year.

For the same reason I believe you should own some bitcoin, I also encourage you to store some of your wealth in guitars, whisky, or other collectibles... as long as you truly know what you're doing, of course.

That's the whole point of this category... Put money into something you have a personal connection with – and that you understand very well.

Other than cannabis, bitcoin, maybe taking a chance on gun stocks, definitely avoiding Tesla, and owning some collectibles or other alternative assets you understand well, I have one more election-related trade for you today...

This is my favorite type of trade – and it's far easier to pull off than any of the ones I've mentioned so far...

Do nothing.

OK, it's not technically an election-related trade, since you're not actively doing something different with your money. But I do still believe I'm correct to characterize it as a trade...

You see, doing nothing is a perfectly acceptable 2020 election-related trade.

I believe the ideas I've shared today could prove to be profitable in the coming weeks, months, or maybe even a year or so. But as longtime Digest readers know, you'll make a lot more money as an investor by not doing anything different than you've always done...

Buying good businesses and assets and holding them for the long term is a much better strategy than anything else you can ever do in the financial markets.

So by all means, trade the election if you must. Or not. In the end, it's your call.

But election or not, remember to keep it simple and focus most of your investment energies on the long term. That will allow you to sleep much better – and wealthier – at night.

New 52-week highs (as of 10/22/20): American Homes 4 Rent (AMH), Expeditors International of Washington (EXPD), Fidelity Select Medical Technology and Devices Portfolio (FSMEX), Green Thumb Industries (GTBIF), MarketAxess (MKTX), Southern Copper (SCCO), and Zebra Technologies (ZBRA).

In today's mailbag, feedback on yesterday's Digest about sharing investing lessons on the way to a funeral. Do you have a comment or question? As always, send your notes to feedback@stansberryresearch.com.

"Hi Corey, thank you for the heartfelt feedback that you shared concerning your recent family losses and connection with your brother. It really resonated with me as we all are dealing with the minutia surrounding our current health shock, political, and social situations.

"It just goes to show that we all need to step away from these things and embrace what is and should be really important to us all... Family, friends, love, compassion, respect, forgiveness, etc.

"We lose sight of these things sometimes as we live the daily rat race, and I appreciate your sharing this with us." – Stansberry Alliance member Steve R.

Corey McLaughlin comment: Here, here. Well said.

"Corey, your insight about investing reasons and choices in the Digest article 'Investing Lessons on the Way to Grandpa's Funeral' are great fundamentals that gave me perspective I needed when I was reading.

"My investment strategies are at a major crossroad and I have been asking myself many of the questions you answered. Most important, my goals for the rest of my life have reached a crossroad in the past few months.

"Your two family members created positive impacts on those around them. My father often told me, 'Give more than you take, and someday when you need help, people will be there to give when you need to take.'

"Your family members certainly followed the advice that my father shared with me over three decades ago. This is what I hope can be said at my funeral (which I hope is at least a few decades away).

"Your Digest article has brightened my morning and gave me several things to think about today and into the near future." – Paid-up subscriber Jerry P.

"Thank you for sharing your personal story about family. Your mother in law and grandfather were very special people. Discussing each of them and the 'why' we invest was heartwarming and enlightening. Today's letter was comforting to this long-term investor and Alliance member.

"Thanks for sharing, and [for] the advice. I too have a brother with a large age spread between us. He is 10 years older than me. We are day and night different. He is now 78 and I am 68. We live across the country from each other but get closer and closer every year.

"How? Just by talking on the phone and some emailing.

"I encourage you to use that 2-hour drive and discussion with your brother to invest in the long-term relationship between the two of you. Let it be a catalyst for more chats and sharing. Family matters, family is why." – Stansberry Alliance member Frank A.

McLaughlin comment: Thank you for the feedback and your perspective, Frank. I'm beyond glad that you and others found some value in what I know is not our typical Digest fare.

And thanks for sharing an example of your "why," too. It has given me something to think about.

Good investing,

Dan Ferris
Vancouver, Washington
October 23, 2020

P.S. If you enjoyed today's essay and want to learn more about how to best position yourself heading into the upcoming election, you'll want to keep an eye on your inbox...

Toward the end of next week, our friend and former U.S. Congressman Dr. Ron Paul will be joining us for an exclusive Q&A interview... And we plan to share his message with as many Stansberry Research subscribers as possible.

Again, we haven't finalized all the details yet. But look for an e-mail in roughly a week. In the meantime, we hope you have a great weekend.