Are 'Trump Trades' Really Sustainable?
3min read Since early November, investors have doubled down on various so-called "Trump trades", seizing the opportunity of Trump and the Republicans' victory in the U.S. election this month. Meanwhile, Wall Street investment banks have hastily compiled annual outlooks for 2025 after the election, but with Trump's policies and their impacts elusive, predictions based on Trump trades are likely to only materialize this year.
It is believed that if Trump's promises are fulfilled, his commitments to corporate tax cuts, increased trade taxes, and restrictions on immigration will expand the already massive budget deficit, strike U.S. Treasury bonds, and boost corporate profits and stock prices. At the same time, investors are also betting that the unexpected consequences of increased trade taxes and crackdowns on immigration may reignite inflation, hinder the Federal Reserve's monetary policy easing actions, and push up interest rates and the U.S. dollar exchange rate.
All of this sounds very neat - to a certain extent, it highlights its correctness in an economy that is already overheating. Since the first week of October - when Trump became the favorite to be elected president on betting websites, the U.S. dollar index has risen by 5%, the 30-year U.S. Treasury yield has increased by 0.5 percentage points, the S&P 500 has risen by 3%, and Trump's potential support for cryptocurrencies has prompted Bitcoin to soar by more than 50%.
The question is, for these trades to last until 2025, investors still need to make multiple accurate predictions about the subsequent policy process.
With two months left until Trump takes office, the market must first figure out which of his promises will truly be realized and to what extent. Among the many issues, there is a more thorny problem of guessing their macroeconomic impacts. Then, investors need to go a step further to determine whether the financial transactions based on this are orderly and in the right direction.
After all, the past few decades have not lacked moments that have shaken the market, but the market reactions to these moments were almost unpredictable. For example, even if someone somehow bet on a global pandemic in 2020, they are unlikely to predict at the same time that the global stock market will rise by 15% in the same year.
Elusive policy effects
Even Trump's staunch supporters have huge disagreements on the possible outcomes, and even the expected outcomes, of his main economic proposals. One of the main bets is the rise in U.S. Treasury yields. This is largely based on estimates of the budget costs of Trump's various tax cut promises, including extending the tax cuts he proposed in 2017 and significantly reducing corporate tax rates. With the Republicans winning a landslide victory in the U.S. Congress - taking the majority of seats in both houses, it now seems that these plans could be realized, and U.S. Treasury bonds have obviously felt the pressure as a result.
However, as Eurizon hedge fund manager Stephen Jen pointed out, the market has hardly paid attention to the severe spending cut plans - even if these plans are partially successful, they may break the long-term forecasts that plague the bond market.
Jen believes that even with partial implementation of the heavily publicized spending cuts and government efficiency drives, by 2028, the annual budget deficit could actually be pulled back to below 1% of GDP. He believes: The net impact on inflation and bond yields is likely to be negative.
Furthermore, what if the proposal to lay off 25-50% of the 2.3 million federal employees plunges the already cooling labor market into deeper panic? Or, what if it leads to job instability and severely damages household confidence?
In this case, the Federal Reserve's reaction function may shift in another direction, not just relying on fiscal stimulus. Then, pulling these strings could disrupt many other trades - the most obvious assumption being that the dollar will continue to rise from current levels.
If the global trade war has a backfiring effect on the United States - with the economy stagnating and suppressing overseas demand, then other principles of Trump trade will also begin to crumble.
As Wall Street investment banks began to release their 2025 outlook this week, analysts seem to generally believe that the U.S. benchmark stock index will rise by another 10%, but this actually depends on the market finding a breakthrough in the middle ground, and this increase is less than half of the annual increase in the past two years. And they all wisely attached risk clauses.
"Trump 1.0 period" Trade Actually Reversed
In 2016, U.S. small-cap stocks led the broad market by 10% in the month after Trump's surprise victory. However, as the time span lengthened, U.S. small-cap stocks significantly lagged behind large-cap stocks (S&P 500) by more than 20% between 2016 and Election Day 2020. Despite Trump's tax cuts being beneficial to U.S. domestic companies, small-cap stocks responded lukewarmly, even underperforming small-cap stocks in other developed markets.
From 2016 to 2020, the U.S. dollar also did not perform strongly under the Trump trade. Both the U.S. dollar index and the Bloomberg U.S. dollar index, which includes emerging market currencies, fell, contrary to initial market expectations.
In addition, the same is true for the U.S. stock market. The U.S. stock market did indeed outperform the MSCI Global Market Index after Trump's victory, but this performance also occurred when Biden won and during Obama's two terms. Moreover, the rise of the U.S. stock market was not due to the Trump trade; it was more of a tech stock trade.
In comparison, the reason for the strong performance of the U.S. stock market is more due to the leadership of tech stocks, especially the strong growth of the S&P 500 and the NASDAQ-100 indices. The profitability of tech giants is the main reason why the U.S. stock market has long outperformed the global market, and this growth is more due to technological innovation and global layout, rather than being driven by Trump's policies. Even though Trump's tax reform helped boost corporate profits, tech giants were not the main beneficiaries.
