Novice Trade: Consumer Discret Sel Sect SPDR ETF (XLY)

Trade: Sell the XLY June 80/82 call spread for $0.15 (ref. $69.79). The cover story in Barron's last weekend asked whether Trump and Sanders are killing the stock market. The reason they are, according to the article, is that as these unconventional candidates become more popular, investors may be re-pricing stocks to reflect greater risks from either of their eventual presidencies. Here's the tightest connection the article would venture: The Standard & Poor's 500 stock index has declined as Trump and Sanders have gained in popularity, based on polling data compiled by RealClearPolitics, which averages the results of multiple national polls. The link, it says, might be more than coincidental. That's a pretty thin thread on which to base a cover story. It's also all wrong. That's not how investing happens. No portfolio managers I've spoken with lately are selling shares of Microsoft (MSFT) or Netflix (NFLX) or MGM Resorts (MGM) today because they think a Trump presidency is becoming likelier and they don't like what that would mean for the economy. Whether you think stocks have fallen this year mostly because of China, or oil, or negative interest rates in Europe and Japan, or whatever, those all clearly have more plausible connections than some early results during primary season. The real connection that should be made is not between politics and the stock market, but between the economy and the stock market, with politics as an epiphenomenal lagging indicator of what is happening in the real world. As income inequality keeps much of the middle class from seeing the benefits of broad growth, those workers have demanded an explanation. On the right, they blame immigrants; on the left, banks. The truth is that wages have been depressed for workers for so long because of globalization and domestic laws -- including the destruction of labor unions -- that maximize the bargaining power of the owners of capital. Record-high corporate profit margins in recent years would have been impossible without artificially low costs for labor inputs. One reason stocks have been volatile since last summer is that more and more investors are realizing that companies will have to be content with lower margins in the future, as the balance of power slowly inches back in the direction of workers. The market is looking forward, in other words, while voters are understandably thinking about the present and recent past. For investors, even if the market recovers from the year-to-date struggles, I believe any upside will be capped in 2016, as rising wages put pressure on companies that have optimized as if the era of cheap labor would last forever. Some tech companies may be unfazed, but a lot of retail and restaurants may see margins squeezed even amid higher sales. May God have mercy on the souls of late-stage Uber investors. We're selling the XLY call spread above on the view that consumer discretionary stocks won't be able to sustain a move back to recent highs through June expiration. It's worth noting, too, that people worrying about damage that may be done by the demagogue or the populist if either wins might want to reconsider. Trump will not be getting Mexico to pay for a wall (the Mexican government has confirmed as much), and will not be knocking on doors to drag undocumented people from their homes. Neither will he enact sweeping new trade policies from the White House. Trump would continue to be unpleasant and unpredictable, but I wonder whether the rest of the political system wouldn't unite to thwart his worst ideas, like a body fighting a disease. Similarly, a President Sanders would struggle to get anything passed except, possibly, a package of infrastructure spending paid for by corporate tax repatriation -- something that even ideological opponents like Rand Paul have supported; and those infrastructure improvements are sorely needed and would be a massive stimulus to the real economy. I addressed the rest of the presidential field last week, but just quickly, the upshot from all of this is that there is probably less to worry about from the political field than breathless media and campaign messaging would suggest. The trade is: -- Sell the XLY June 80/82 call spread for $0.15 (ref. $69.79).

Novice Trade: Consumer Discret Sel Sect SPDR ETF (XLY)

Consumer discretionary stocks won't be able to sustain a move back to recent highs soon.

Columnist Conversation

A Recent Director Buy in Children's Place (PLCE)

A $525,000 Vote of Confidence on Macerich (MAC)

This Weekend on Real Money

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.