Market Bets On Democrats' Magic Wands—Why You Should Be Skeptical

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Unrealistic Expectations

Please click here for an enlarged chart of State Street Health Care Select Sector SPDR ETF (NYSE:XLV)/a>.

Note the following:

li>As a reminder, we are politically agnostic.  /li> li>The momo crowd is now betting Democrats have magical powers to fix healthcare, housing, and everyday living expenses. Here are the realities investors should not overlook:

li>Unlike periods when one party controlled the White House and both chambers of Congress, this time Democrats do not have a free run. President Trump is still the president, and the Constitution gives him veto power./li> li>Neither party has a magic wand to make massive federal deficits and the national debt disappear./li> li>The momo crowd may soon discover that political promises are much easier to make than to deliver./li> /ul> /li> li>At this time, it is especially important for prudent investors to separate their politics from their investing. /li> li>The chart shows the move up in healthcare ETF XLV on the midterm election results./li> li>RSI on the chart shows XLV is overbought. Overbought ETFs are susceptible to a pullback./li> li>XLV is up 22.5% year-to-date.  In contrast, AI king NVIDIA Corp (NVDA) is up only 7.3% year-to-date.  This illustrates the power of diversification and properly structuring a portfolio.  As a full disclosure, XLV and NDA are in our portfolio. /li> li>The stock market's new narrative is an apparent belief that Democrats have a magic cure for consumers struggling with healthcare, housing, and everyday living expenses. The momo crowd is aggressively buying stocks that stand to benefit assuming Democrats will be able to deliver on their campaign promises.

li>Insurance stocks are rallying on hopes that Democrats will protect Medicaid, restore healthcare subsidies, and expand insurance coverage.  Examples of stocks being bought are Centene Corp (CNC), Molina Healthcare Inc (MOH), and Oscar Health Inc (OSCR)./li> li>Hospital stocks are rallying on the assumption of more insured patients and fewer unpaid bills.  Examples of stocks being bought are Tenet Healthcare Corp (THC) and HCA Healthcare Inc (HCA)./li> li>Homebuilders are rising on hopes that Democrats will make housing more affordable, bringing buyers back into the market.  Examples of stocks being bought are D.R. Horton Inc (DHI) and KB Home (KBH)./li> li>Retailers and consumer discretionary stocks are gaining on expectations that consumers will have more money to spend.   Examples of stocks being bought are Walmart Inc (WMT), Dollar General Corp (DG), and Kroger Co (KR)./li> /ul> /li> li>strong>In the middle of the momo crowd's uber bullishness about Democrats' magic cure, prudent investors need to separate reality from wishful thinking.  In our analysis, here are the key points:

li>More subsidies may help consumers and hospitals, but they do not lower the underlying cost of healthcare. Someone still has to pay./li> li>Democrats cannot wave a wand and lower mortgage rates, construction costs, or home prices. Building more homes takes years./li> li>More government assistance may boost spending, but it does not make groceries, insurance, or other necessities cheaper./li> li>Putting more money in consumers' pockets without increasing supply can push prices even higher./li> li>More spending without offsets could push Treasury yields higher, making mortgages even less affordable./li> li>Lower prices for consumers can mean lower profits for businesses. The momo crowd seems to be overlooking this conflict./li> li>Some companies will genuinely benefit from policy changes while others are simply being bid up on hopes that may never materialize./li> /ul> /li> li>In our analysis, investors blindly chasing campaign promises may be making a costly mistake.  History tells us that campaign promises and governance are two different things. /li> li>The momo crowd’s belief in Democrats’ ability to deliver on campaign promises is bifurcating the AI trade.  Investors are buying hyperscalers such as Microsoft Corp (MSFT), Amazon.com, Inc. (AMZN), and Alphabet Inc Class C (GOOG), while selling semiconductors, data center equipment suppliers, and power companies.  Examples of stocks being sold are Micron Technology Inc (MU), Advanced Micro Devices, Inc. (AMD), Intel Corp (INTC), Vertiv Holdings Co (VRT), and Vistra Corp (VST). strong> Unlike some of the other post-election trades, this one has some basis, but both buying and selling are overdone:

li>As we shared in yesterday's Morning Capsule, restrictions on new data centers make existing data centers more valuable./li> li>Microsoft, Amazon, and Alphabet have a major advantage. Their existing infrastructure becomes more valuable and harder for competitors to replicate./li> li>Fewer new data centers could also mean less capital spending, better free cash flow, and reduced risk of overbuilding./li> li>Semiconductor companies, cooling and electrical equipment suppliers, and data center builders face the prospect of fewer orders./li> li>Smaller data center operators with heavy debt are especially vulnerable to construction delays./li> /ul> /li> li>In our analysis, the momo crowd is missing a simple fact that hyperscalers are the biggest buyers of semiconductors.  /li> li>We have been sharing with you our analysis that semiconductor supply and demand may come into equilibrium in 2028./li> li>We have been sharing with you that physical AI is ahead – robots, autonomous vehicles, drones, and intelligent industrial machines.  Physical AI could eventually use more semiconductors than today’s data centers. /li> li>Initial jobless claims came at 189K vs. 197K consensus. This indicates that the employment picture is strong./li> li>The official jobs report will be released tomorrow at 8:30am ET and may be market moving./li>

Magnificent Seven Money Flows

Most portfolios are now heavily concentrated in the Mag 7 stocks.  For this reason, it is important to pay attention to early money flows in the Mag 7 stocks on a daily basis.

In the early trade, money flows are positive in Amazon (NASDAQ:AMZN)/a>, Microsoft (NASDAQ:MSFT)/a>, Alphabet (NASDAQ:GOOG)/a>, Meta (NASDAQ:META)/a>, and Apple (NASDAQ:AAPL)/a>.

In the early trade, money flows are negative in Nvidia (NASDAQ:NVDA)/a> and Tesla Inc (NASDAQ:TSLA)/a>.

In the early trade, money flows are neutral in SPDR S&P 500 ETF Trust (NYSE:SPY)/a> and Invesco QQQ Trust Series 1 (NASDAQ:QQQ)/a>.

Momo Crowd And Smart Money In Stocks

Investors can gain an edge by knowing money flows in SPY and QQQ.  Investors can get a bigger edge by knowing when smart money is buying stocks, gold, and oil.  The most popular ETF for gold is SPDR Gold Trust (GLD).  The most popular ETF for silver is iShares Silver Trust (SLV).  The most popular ETF for oil is United States Oil ETF (USO).

Bitcoin

Bitcoin (CRYPTO: BTC) is seeing buying.

What To Do Now

Consider continuing to hold good, very long term, existing positions and add tactical positions based on signals.

The Arora Report is known for its accurate calls. Most recently, we correctly called the rally from recent stock market lows and the 2026 semiconductor decline before a 25% drop in the Semiconductor ETF (SMH). In gold, we bought at an average price near $1,105, close to cycle lows, and took partial profits near $5,400, close to cycle highs. Please click here to get our free forever Generate Wealth Newsletter.

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