My Top Trump Hedges

|
Includes: BA, BP, CLD, GLD, KOL, LMT, NOC, VXX, XOM
by: Shane Legatzke

Summary

Donald Trump has recently risen in the polls and now trails Hillary Clinton by just 0.5% of votes.

While Clinton still has a great chance at winning (especially eying her campaign funding), I recommend considering "Trump hedges" to limit immediate downside and protect assets if Trump is elected.

This article goes through some of the areas of the market that should benefit most if Trump wins in November.

The upcoming presidential election involves two wildly different candidates, each of whom would have distinctly different effects on US and global markets. Up until recently, Hillary Clinton has enjoyed a significant lead in the polls against Donald Trump, but with just over three months left until election day, her lead in the polls has slipped to a narrow 0.5% margin (polling data from the New York Times):

Click to enlarge

A lot of investors (myself included) have been operating under the assumption that Clinton would win in November against politically inexperienced Trump, who has also raised significantly less funding for his campaign - just $91.4 million raised in 2015 and 2016 compared to Clinton's $374.4 million according to OpenSecrets.

But with his gain in the polls, I think it's time to account for a real chance of Trump obtaining the presidency. A shocking Brexit vote proved that Wall Street isn't always on the same page as Main Street - if British working-class citizens, fed up with economic hardship and blaming immigration, could vote to leave the EU, similarly frustrated Americans might just elect Donald Trump.

Trump, like Brexit, spells uncertainty. Because people simply don't really know what type of president he would be, it is likely that most stocks would sell off in the immediate aftermath of his being elected. I predict a similar hit could occur to US stocks as what happened to UK stocks after the Brexit vote:

^UKX Chart

^UKX data by YCharts

I still think there is a high probability that Clinton will defeat Trump, especially considering the funding advantage her campaign enjoys and the fact that it is much more organized than Trump's. However, for risk-minded investors, I think it would be intelligent to consider utilizing "Trump hedges" - a strategic position or two entered with the sole objective of keeping portfolios afloat in November if Trump does end up victorious. Here are some of my ideas:

Gold

Gold, whether through the metal itself, gold stocks, or the SPDR Gold Trust ETF (NYSEARCA:GLD) would certainly rise if Trump got elected. Gold has historically been a favorite of investors in times of uncertainty; for example, it rose 8% to all-time highs after the Brexit vote. The fact that it is dollar-denominated means it would benefit even further if the dollar weakens anywhere near the extent that the pound did after Brexit (it fell nearly 10% vs. the dollar the day after the vote and another 2% the next trading day).

Coal

This might be my favorite Trump hedge. The coal industry, while mostly damaged by falling natural gas prices, also has suffered under an environmentally minded President Obama. A President Clinton would provide more of the same heavy regulation - she has stated that she would "put a lot of coal miners and coal companies out of business."

Trump, however, does not appear to share the same positions on the environment. In 2012, he stated in a tweet that "the concept of global warming was created by and for the Chinese in order to make US manufacturing non-competitive." and saying earlier this year that he was going to "save the coal industry." Released from the threat of intense regulatory pressure, coal stocks would immediately soar if Trump was elected. My favorite coal pick is Cloud Peak Energy (NYSE:CLD); you can read my research on them here. The coal ETF (NYSEARCA:KOL) is another option.

Defense

Defense stocks, like Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), and Northrop Grumman (NYSE:NOC) should also see a boost if Trump is elected president. Trump stated this year: "I'm gonna build a military that's gonna be much stronger than it is right now." He has professed again and again that as president he would seek to aggressively bomb ISIS, including a 2015 speech in which he stated about ISIS "I would bomb the s--- out of 'em. I would just bomb those suckers. That's right. I'd blow up the pipes. ... I'd blow up every single inch. There would be nothing left." In addition, nationalistic Trump is probably more likely to lead us into conflict than the more stable Clinton.

Volatility Index

The volatility index ETF (NYSEARCA:VXX) is another quick and easy way to play potential uncertainty - here's how it performed immediately after the Brexit vote:

VXX Chart

VXX data by YCharts

What about oil? Some analysts have asserted that because Trump is pro-energy, oil stocks like Exxon (NYSE:XOM) and BP (NYSE:BP) would benefit under his presidency. While a weaker dollar would boost oil prices, I hesitate to recommend oil as a Trump hedge because the candidate's plan as far as oil is concerned seems to be regulating less and drilling more. Oil is currently in a glut, and producing more in the US would only make the state of oversupply worse.

I'm not confident that a weaker dollar and less regulation would outweigh the problems Trump's "drill more" plan would cause to supply and demand, so I judge my other picks above to be better Trump hedges than oil. As you will see in my disclosure, I am long BP, just not as a Trump hedge.

Of course, my list isn't all-encompassing, there are sure to be other quality Trump hedges (feel free to include your favorites in the comments). In terms of portfolio strategy, my recommendation is to pick one or two Trump hedges before November and allocate somewhere in the vicinity of 25% of your portfolio into them. This will protect your assets in the case that Trump does get elected, and (depending on your picks) shouldn't hurt performance too badly if Clinton wins.

Disclosure: I am/we are long BP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.