Trump’s Arrest Is Damaging To Stocks. Here's What You Should Do Right Now

Stock market investors are facing a major risk as a result of the arrest of former President Donald Trump.

During the midsummer deadline for Congress to raise the debt ceiling, the Republican Party may turn the debt ceiling into an attack on a Democratic party that spends lavishly on itself, injecting extraordinary volatility into the global economy. The result is that a seemingly mundane vote could end up becoming a battle royale over the country's extraordinary debt, taxes, and spending practices.

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It is not of any particular importance what the details of the case are because sound bites are more important at this point. Prominent Republican politicians have already criticized Trump's prosecution as partisanship on the part of the Democratic party. They could respond by making a point about the government's expenditures.

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In the past few years, Trump has been criticized by some prominent Republican leaders as a political victim by a Democratic district attorney, Alvin Bragg, in Manhattan. Despite the fact that Trump is running again for the presidency, he insists that he has done nothing wrong. Bragg asserts that Trump has committed a felony for the alleged hush-money payment to a porn actress as well as other related charges.

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Yellen, the Treasury Secretary, warned Congress in March that not raising the debt ceiling would have a profound impact on the market. She cited dire consequences for regional banks and the broader financial system if the debt ceiling were not raised, as well as grim consequences for the economy in general. In January, the government reached its spending limit. As a result, Yellen has been using “extraordinary measures” to provide funding until the summer of 2017.

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It is possible that our enemies might be able to challenge the dollar's status as the world's reserve currency if the U.S. government cannot pay its bills any longer.

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There may be times when it is not prudent to rely on the U.S. dollar as its reserve currency if other nations decide it is not prudent to do so for fear that America's financial system has been politicized. U.S. Treasury bonds, for instance, are not considered to be the safest investments in the world anymore. There has been a long history in which China has competed with the United States on this front for years.

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In our recent analysis of Silicon Valley Bank's and Signature Bank's failures, we predicted that the federal government would likely come up with a plan to protect banks. This is borne out in the stability of the SPDR S&P Regional BankingKRE –2.24% exchange-traded fund (ticker: KRE) so far. As Yellen's warning has been echoed in the past few weeks, and the poisoned political climate in America is making America increasingly polarized, it is difficult to ignore the warning. As a result of the large amount of Treasury bonds held by regional banks, regional banks are particularly vulnerable to a debt-ceiling block.

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I would rather discuss something that is reasonably concrete than get entangled in politics: option volatility. Stock market volatility, as measured by the Cboe Volatility Index, is around 19, suggesting little concern for the short-term trajectory of the market. In the next seven months, VIX futures are expected to be higher, suggesting investors are more concerned about market risks. 

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The SPDR S&P Regional Banking ETF offers aggressive investors the opportunity to hedge against a debt-ceiling vote by buying a put option and selling another put with a lower strike price but a similar expiration. It will increase in value if the ETF declines. (Puts give a buyer the right to sell a particular asset at a set price and time.)

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At $42.46 the ETF's September $40 put would be worth $2.20 and the September $30 put would be worth $2.40. The spread would be worth $7.80 if the ETF is at $30 at expiration.

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The money spent on the put spread will be lost if the debt-ceiling issue is resolved and the ETF advances. However, a resolution appears to be elusive at the moment.

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