Since his disastrous performance at the first 2024 presidential debate, most of the conversation has focused on when 81-year-old President Joe Biden would withdraw from the race. Sure enough, Biden exited the campaign this weekend and endorsed Vice President Kamala Harris. The reason this matters to investors is the so-called Trump trade. The stock market did very well following former President Donald Trump’s victory over Hillary Clinton in November 2016, but smaller businesses, in particular, were beneficiaries. When we listen to some of the policy ideas that Trump has discussed, such as measures intended to protect smaller U.S.-based businesses, companies in the small-cap Russell 2000 index stand to benefit. Some of Trump’s proposals include tariffs on a broad array of imported goods. Whether such tariffs are advisable is a broader conversation. The Russell 2000 , which was essentially flat for the year through early July and was underperforming the S & P 500 by more than 16%, has surged along with Trump’s prospects. Since the June 27 debate, the Russell 2000 has outperformed the S & P 500 by more than 6 percentage points. So, investors must acknowledge that if Trump’s path to victory against Harris or a potential unknown pinch-hitter is less certain, then uncertainty must, by extension, apply to the Trump trade. .SPX .RUT 1M mountain SPX vs Russell in past month We can assume that most investors realized that Biden would withdraw, and the betting markets suggested that Harris was his most likely replacement. The hedge an investor in small caps should consider then must be for the unknown opponent that Trump could face if Harris turns out not to be the nominee — and that person will be identified by the end of August. I had previously suggested a hedge through the election for the broad market was advisable, in part because the market’s run so far has been quite extraordinary, but I now believe the hedge should be applied more tactically to small-cap stocks. An example of how to hedge would be a put spread on IWM, the Russell 2000 ETF, such as the September 210/200 put spread which, at $2.30, offers a payout of better than 3-to-1. DISCLOSURES: All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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