Editor’s Note: Record highs? Don’t get too comfortable.

The stock market’s party in 2024 has left investors feeling euphoric, with the major indices perched at all-time peaks. But like all good parties, this one is likely to end with a wicked hangover.

The catalysts for this market correction? A potent cocktail of Donald Trump’s economic policies, Elon Musk’s impulsive antics, and a sprinkle of market hubris.

Let’s break down the three ways these factors are setting the stage for a financial meltdown…and, more importantly, how you can protect your portfolio when the house of cards comes tumbling down.

1. Tax Cuts for the Rich, Paid by… Nobody

Trump’s second round of proposed tax cuts, a sequel to the 2017 GOP tax bonanza, is widely criticized by most economists (the credible ones, anyway) as inflationary. The cuts would disproportionately benefit corporations and the ultra-wealthy while ballooning the national debt to unsustainable levels.

Sure, Wall Street might cheer in the short term as buybacks surge and corporate profits remain artificially inflated. But what happens when interest rates creep up, and Uncle Sam starts choking on those IOUs? A debt crisis could spook bond markets and send equities into a tailspin.

Investor Move: Rotate into dividend-paying stocks in defensive sectors like utilities and consumer staples. These companies are less dependent on tax cuts and are typically more resilient during market downturns.

2. Tariff Tantrums: A Trade War Encore

Remember the tariff wars of the late 2010s? Trump’s love affair with punitive trade measures is back, this time aimed not only at China but also at Europe, India, and anyone else who dares to sell goods cheaper than America can.

The tariffs are poised to push input costs higher for U.S. companies, crush global supply chains, and drive up consumer prices—all while failing to address actual trade imbalances. The result? Margin compression for corporations and a potential hit to earnings that could rattle investor confidence.

Investor Move: Consider exchange-traded funds (ETFs) that focus on emerging markets poised to benefit from trade diversions, such as Vietnam, Indonesia or Mexico, which could become winners in this chaotic game of trade chess.

3. Crony Capitalism on Steroids

The cozy relationship between Trump and corporate titans like Elon Musk is a recipe for market distortions. Musk’s erratic behavior—whether it’s launching a risky new business initiative, ignoring the businesses he already owns, or flippantly commenting on X about geopolitics—only adds fuel to the fire.

In this environment, government policies increasingly favor big-name players while leaving small- and mid-cap companies to fend for themselves. This favoritism erodes market competition and creates systemic risk as the economy becomes too reliant on a few giants.

Investor Move: Diversify into mid- and small-cap companies in sectors with lower exposure to political favoritism, such as renewable energy or healthcare.

A reckoning for record highs…

The stock market has defied gravity for longer than anyone expected, but the laws of financial physics haven’t been repealed. By nearly every valuation metric, the stock market is frothy.

A correction is overdue, and the policies emanating from Trump’s playbook, enabled by Musk’s carnival of chaos, are likely to light the fuse.

For investors, now is the time to embrace pragmatism over blind optimism. Rebalance your portfolio, hedge against volatility, and avoid the temptation to chase speculative gains. The ride might get bumpy in 2025, but with the right strategy, you can avoid getting thrown from the roller coaster.

Questions or comments? I’d love to hear from you. Drop me a line: mailbag@investingdaily.com

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