The Trump Trade

An extreme event study estimate

Event studies are privileged because it is unlikely that anything much more significant was driving asset prices in the immediate aftermath of a major event. So, if Powell is speaking, it is unlikely (but possible) that another development systematically affects asset prices. On average, idiosyncratic shocks (like a firm inexplicably declaring earnings while Powell is speaking) wash out. What we are left with is the market’s response to the possibility of the shock exposed at the event.

When President Trump dodged a bullet, the United States evaded a potential civil war and markets repriced to reflect a much higher probability of a second term for Trump. We can use the immediate aftermath (in market hours) of the assassination attempt to isolate the Trump signal. We take a very simple approach to this problem. We look at CAPM residuals of the returns on the first trading day after the assassination attempt as the signal.

Specifically, as of July 15, 2024 (the first trading after the event), we compute 252-day-return market betas of about 1600 stocks that meet our liquidity threshold (the price impact of trading them is trivial if you trade merely millions rather than billions of each of the stocks). We compute the CAPM residuals as actual return less (market returns times beta). We sort the stocks on the residuals on that day. The highest 200 stocks form the long side and the lowest 200 stocks by residual form the short side of our dollar-neutral Trump portfolio. We form impossible look-back portfolios for the whole year to learn what these stocks have been up to since the beginning of the year (the information to form them was not available until July 15).

The patten is very intuitive. The terminal crisis of the Biden presidency began with the debate on June 27 (red); Trump was shot on July 13 (black).

This is very satisfying. It suggests that our Trump signal captures something real about the market’s judgement about political risk.

In as much as this sort of thing is possible, I predicted what is now the terminal crisis of the Biden presidency. Specifically, I wagered in passing that Russia is more likely to engineer a regime change in the US than vice-versa.

We have seen how Trump have weaponized Biden’s unnecessary war in Ukraine against him. Even that reliable bludgeon, inflation, is in part due to Democrat Russia policy. No one listened to my warning before, but here we are.

Look, the idea that … anyway. Let’s get back to the topic at hand. Which firms are in play in the Trump trade?

We look at the top ten long trades first. Two of them are oil and gas firms. MXL is a semiconductor firm that is likely to benefit from Trump’s trade war; in particular, his war against TSMC.

Most of the shorts (companies that are expected to suffer in a Trump world) are solar companies. This makes sense too, for the obvious reason.

The problem with doing everything by the book—unlike the crypto guys—is that it takes too long to launch a fund to trade the thesis. By the time it is launched, the election would be over and the entire trade priced in. Anyway, let me know if you want access to the data.

One hopes that the Dems are able to meet the moment. Everyone knows that the only right and just and proper thing to do is to have a real primary. The sooner we get there the better. This is only over if Dems as a whole croak; not just Biden.