By Steven M. Sears
Major technology leaders were honored guests at President Trump's inauguration on Monday. Meta Platforms' Mark Zuckerberg, Amazon.com's Jeff Bezos, Apple's Tim Cook, and Alphabet's Sundar Pichai all sat near Trump's family.
On Tuesday, Trump and OpenAI, SoftBank Group, and Oracle announced an investment of as much as $500 billion in artificial-intelligence infrastructure.
The news capped a buoyant week in the markets, with investors reversing their bearish bent, which had been the predominant market trend since Christmas. The yield on 10-year Treasury bills declined from the equity-adverse level of 4.7% to about 4.5%. The U.S. dollar also declined, which should boost the earnings of America's multinational corporations.
The question for active investors to ponder is if these favorable conditions will persist. Trump threatened to levy tariffs of 25% on Mexican and Canadian goods on Feb. 1, as well as raise existing tariffs on Chinese goods. The administration could be threatening tariffs to compel Canada and Mexico to negotiate. The same is true of China.
The next course of action is unclear. Tariffs may or may not drive stock prices lower. Long-term investors, of course, should carry on and add to positions on weakness, but professional investors who live and die by quarterly results face uncertainties that are hard to forecast.
The U.S. stock market has awaited Trump with great anticipation. Analysts have focused on the corporations they cover, while fund managers have generally tried to remain focused on core issues, like earnings, inflation, and interest-rate cuts. But Trump looms over everything. He merits inclusion in financial models, though it is hard to know how to reflect his value.
Trump unusually represents the three states of risk and opportunity that influence stock prices and options volatility. He is at once a known known, a known unknown, and an unknown unknown. Should he communicate clearly and consistently, the stock market's fear gauge -- as the Cboe Volatility Index, or VIX, is known -- should remain subdued and stocks should rise. The opposite is also true.
Deep within the derivatives markets, sophisticated investors are far from sanguine. Futures on the VIX are elevated -- which suggests such investors are hedging against a stock decline even though Trump's policies are expected to benefit stock investors.
The activity doesn't indicate active preparations for a sharp stock decline, as such investors always try to balance risk and reward. The trading is seemingly devoid of panic. Instead, think of the VIX futures curve as a way to express Ronald Reagan's dictum: Trust, but verify. VIX futures are a natural offset to potential stock declines.
Presidents have historically tried expanding their power over the legislative and judicial branches. Trump's domination of the Republican Party, coupled with an electorate that appears to be tilting right, might enable him to achieve that.
We recently suggested that investors hedge, and that remains relevant. But opportunity may exist in the technology sector. To embrace that thought, investors can consider a bullish strategy on the Technology Select Sector SPDR exchange-traded fund (ticker: XLK).
With the ETF at $236.02, investors could buy the June $240 call option and sell the June $255 call for about $6.60. If the ETF is at $255 at expiration, the bull spread is worth a maximum profit of $15.
The strategy, which entails buying a call and selling another with a higher strike and similar expiration, is used when investors want to cost-effectively harness an asset that is expected to rally. (A call option gives the holder the right to sell an asset at a set price within a set period.)
The trade anticipates that the ETF sets a record high. That might seem ambitious, but remember who sat near Trump when he retook the oath of office.
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(END) Dow Jones Newswires
January 24, 2025 21:30 ET (02:30 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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