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For Traders From Club iNSIDER: S&P 500 and Nasdaq 100 Awaiting: Will the Uptrend Continue After the Inauguration?

The dollar, FTSE 100, and Nasdaq were the biggest winners based on risk correction since Trump won the elections. Now, the dollar shows signs of readiness for a correction after his inauguration. The Dollar Index surged nearly 6% since the end of the US elections. But even more impressive is its adjusted return, measured through the Sharpe ratio, which was the highest compared to alternative investments in some popular assets, including S&P 500, Nasdaq 100, FTSE 100, Shenzhen 300 Index, Japan’s Topix index, and gold. The Sharpe ratio measures a portfolio’s return above the risk-free rate, adjusted for the risk associated with the investment. Three assets showed a negative Sharpe ratio, as they recorded losses during the period. Adding Bitcoin — which surged more than 50% after the elections — would place the cryptocurrency at the top, but this is in line with its status as an ultra-volatile speculative asset.

The research period begins after the U.S. elections, but in reality, markets started increasing the value of the dollar from the end of September — making its gains even more impressive for this horizon. This also suggests that the asset is trading far above its fundamentals and is now close to overbought territory. (You can read more about the dollar’s vulnerability from my colleague Simon White here). What happens next depends on the timing of any announcements from the White House regarding tariffs. If this coincides with the inauguration later in the day, the dollar will almost certainly continue to strengthen. Reports suggest that Trump plans multiple executive orders related to immigration, energy, federal employees, and regulatory reforms in the early hours of his presidency, but importantly, there is no mention of tariffs in this report. If markets sense that the announcement could take weeks or even months and is not imminent, smart money will likely be ready to exit the dollar, inclined to take profits. This is why the Sharpe ratio at the end of this year will not be anything impressive. When Donald Trump takes the oath of office as the next U.S. president on Monday, stock market investors will have one big reason to breathe a sigh of relief. History shows that the performance of stock indices usually improves during the three-month period following the inauguration day. Despite all the uncertainties surrounding the policies that traders discuss before Trump’s second term, such concerns typically accompany all presidencies, albeit to varying degrees. Even then, history shows that the average three-month performance of the S&P 500 before the ceremony is around 1%, compared to a 3.7% rise afterward, according to Jefferies’ analysis based on data from 1929. “The index tends to trade erratically around inaugurations,” say strategists at the firm, “but things begin to improve after a few months.” In fact, on average, the S&P rises by 8.3% six months after the inauguration and by around 9.5% after 12 months, according to Jefferies. The S&P 500 has risen by 1.6% over the last three months, with concerns about stubborn inflation, higher interest rates for a longer period, and rising bond yields limiting growth opportunities towards the end of the year. However, this week, the unexpectedly lower inflation report, strong quarterly results from some of the largest U.S. banks, and the possibility of a Middle East ceasefire have lifted sentiment.

Investors are now waiting for the political actions that the new administration will announce, some of which could happen as early as next week or even on Monday. In the short term, volatility is almost certain. “We’re back to what feels like a more neutral position. Attention is likely to quickly shift toward next week and President Trump’s inauguration, as well as his initial political plans,” said Michael Brown, senior research strategist at Pepperstone. The biggest risk associated with the inauguration is linked to potential executive orders, according to investors. The sentiment is that Trump may push through aggressive actions, triggering mass sell-offs or impulsive reactions. And given that these orders could cover a wide range of issues—from trade to immigration and geopolitics—positioning around them is particularly challenging. “Risk sensitivity is cautious around Trump’s inauguration, given the wide range of potential outcomes,” said Stuart Kaiser, head of U.S. equity trading strategy at Citibank. The forecasted volatility for the S&P 500 is an average of 13.2% for the period from January 22 to 24, which is about 1.3 points above the usual value of 11.9% for regular days over the following month.

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