As you already know (it’s impossible to miss), President Trump’s former campaign manager, Paul Manafort, and his business partner, Rick Gates, were indicted on charges ranging from hiding overseas payments to conspiracy to defraud the U.S. On top of that, another former foreign policy adviser, George Papadopoulos, pleaded guilty to lying to the FBI.
Now all the media pundits want you to believe that these are the single most important events of the decade – even bigger than Watergate – and that they could put an end to this historical stock market rally.
And while I agree that the political impact from these events could be huge, the talking heads couldn’t be more wrong about the effect these “bombshells” will have on the markets.
In fact, there’s a much bigger development happening right now – and it’s the one thing you should really be paying attention to…
How Political News Actually Drives the Markets (It Really Doesn’t)
When we woke up to those “bombshells” Monday morning about Manafort, Gates, and Papadopoulos, a big concern was what kind of impact this would have on the financial markets.
As it turns out, not much of one.
Now I am not downplaying these political developments as non-events. They can and will have an impact on things in our country and what happens on a global scale.
But when it comes directly affecting the markets, it is financial market news that matters most. In fact, despite what the talking heads will tell you, political news doesn’t really affect the markets much at all.
Business news and news about actual companies (especially during earnings season) is going to impact the markets more heavily than these political news stories.
The two political news items on Monday hardly influenced the markets at all.
The Financial News That Moves the Markets
Take Merck & Co., Inc. (MRK) for example…
Regardless of the Russia news, Merck’s third quarter earnings actually had a much bigger impact on the market.
Here are the biggest takeaways on MRK:
- Merck downgraded to “hold” from “buy” at SunTrust Robinson Humphrey (SunTrust’s investing branch)
- Merck’s stock price target was cut to $54 from $73 at SunTrust RH
- Merck’s stock fell 4.2% pre-market after that downgrade
- Merck’s stock is on track to open at a 16-month low
On Monday, MRK accounted for 20-points of the Dow’s decline.
Then there’s Amazon.com, Inc. (AMZN)…
AMZN crushed earnings, reporting earnings per share (EPS) and revenue of $0.52 per share on a revenue of $43.7 billion versus the earnings estimate of $0.18 per share on a revenue of $42.0 billion. That drove their stock price to an all time high of $1,110, which also propelled the NASADAQ and S&P 500 to new record highs.
You can see the direct effects AMZN‘s news had on the markets. The markets were trading down the entire week before AMZN‘s announcement, and this price action wiped out the losses for the week.
Now let’s discuss the biggest political news that will affect the markets: tax reform.
As you know, President Trump wants to implement the largest tax cuts in history, including a phase-in of a corporate tax reduction (up to 20%) by 2022.
Now if tax reform doesn’t pass, we’ll likely see a big pullback in the markets (and vice versa if it does). That’s when we’ll see a big pullback, even a correction, in the markets and that’s what could ultimately affect your wallet.
So here’s the best way to make a buck off tax reform, go long on the indices like Dow Jones Industiral Average (DJIA) or PowerShares QQQ ETF (QQQ), for example. Don’t focus on any single stock to bet the farm on when it comes to tax reform – consider long call options on the indices and look at options with January expirations (indices also get a bump at the end of the year, which is why you want to consider January expirations).
And remember, the most important thing is to not buy into all the political hype right now… you’re not going to see much more than a kneejerk reaction (if any) to the political news because it’s already been built into the tone of the markets.
So don’t listen to all the noise.
To your continued success,
Tom Gentile
P.S. Up Next: For decades, politicians like President Reagan, President Bush Jr., and President Trump have been using this unusually lucrative “program” to build unimaginable fortunes. While most have no idea this “program” exists, it could be worth $68,870 or more to the Average American. Continue here…
