(Bloomberg) -- Republican Donald Trump’s election win quickly pushed up US stocks, the dollar and Bitcoin — reshaping the outlook for investments as he prepares to return to the presidency in January. The “Trump trade” is set to hang over markets, with his disruptive policy agenda of tariffs, tax cuts and deregulation driving big moves across the global investment landscape. The era could get even more volatile with Trump looking to break norms on everything from free trade to Federal Reserve independence.
But how much further can the Trump trade go? Assets from stocks to corporate bonds look expensive relative to history, and protectionist policies threaten to refuel inflation. On top of this, the US economy already faces a ballooning fiscal deficit and a softer labor market that could weigh on growth prospects. And remember: in his first term, key wagers — like betting on small companies and the US dollar — petered out.
What exactly is the Trump trade?
The Trump trade concept took off after his first presidential win in 2016, which was followed by a surge in US equities and the dollar — similar to what happened after the election this November. Another market echo from eight years back: in the equity market, bank stocks have been among the fastest risers, bolstered by expectations of a lighter regulatory burden, while small-cap stocks have jumped on optimism over lower taxes and investment-related policy promises. More broadly, the moves signal investor faith in the Trump administration’s policies to stoke economic growth and corporate profits.
Is the market reaction the same as eight years ago?
Sort of. Like in 2016 election, the dollar surged. The S&P 500 rallied to fresh highs after the 2024 vote given the Republican Party’s tax-cutting pledges, while bank stocks and the Russell 2000 index measuring the stock performance of companies with relatively small market capitalizations outperformed. But the market reaction in fixed income has been less consistent. After jumping on the first day after the election, 10-year Treasury yields retreated in the following two sessions before rising again. The gyrations reflected the doubts of market players on where the Trump trade goes next. Adding to the mix is the Fed now being in a mode of lowering interest rates.
Cryptocurrencies are a key plank of the Trump trade this time around, given his vow to implement a game-changing regulatory agenda in favor of digital assets and create a strategic US stockpile of Bitcoin. All that is spurring day traders and institutional pros alike to lavish billions of dollars on digital currencies, in turn sending coins across the asset class to record highs.
Is all of this good for Wall Street?
No. There are big industries vulnerable to Trump’s agenda. Clean energy is one, as the president-elect has long criticized climate policies as the “green new scam.” For stocks and currencies from the US’s major trading partners, such as Europe and China, Trump’s threat to increase tariffs on US imports is a risk. Tariff hikes could also exact a heavy toll on the US economy by fueling inflation.
Is there always a trade tied to a new president?
Not really. Traders try to spot winners and losers when a new administration moves into the White House, especially when the opposing party takes over. Democrat Joe Biden’s election in 2020 was viewed as a boon for electric-vehicle and cannabis stocks but a bane for private prisons.
But Trump is unique. Rarely have markets reacted in unison on this scale to presidential prospects. Trump’s victory in 2016 defied predictions based on major polls. It initially sparked a 5% drop in S&P 500 futures, but losses were erased hours later as traders quickly came to terms with his business-friendly policies.
This time, the S&P 500 climbed 2.5%, marking the best post-Election Day in history, as Trump emerged as the absolute winner in what was forecast to be a tight race.
Can Trump take credit for overall market gains?
Markets have tended to go up over the long haul irrespective of who occupies the White House, and the link between presidents and the performance of stocks overall seems tenuous.
Returns in the S&P 500 are on track to do better under Biden than during Trump in his first term. As much as Trump wanted to take credit for an equity bull market, US shares gained momentum way before he was elected in 2016. The stage was set right after the 2008 financial crisis, when the Fed shifted to a rescue mode, helping sustain a prolonged economic expansion. The stock market boom has continued under Biden’s presidency with the largest publicly traded US companies leading the trade during pandemic lockdowns and the artificial-intelligence craze driving the recent surge.
This year, stocks and Treasury yields started climbing months before Trump’s odds of winning picked up in the betting markets. The climb was driven by an economy that proved more resilient than expected.
How long can the Trump trade last?
It’s hard to say. Momentum from the 2016 election began petering out several months later. At the time of the next presidential vote in 2020, a slew of Trump trades — a stronger dollar, higher Treasury yields and outperformance in bank and small-cap stocks — were either pared or reversed due in large part by the pandemic disruption.
Today’s economy and markets are at a more mature stage than they were eight years ago. The S&P 500 is traded at 26 times reported earnings, a multiple that’s 35% higher than in 2016. That leaves little room for a fresh valuation-driven rally and raises the bar for Trump’s policies, such as tax cuts, to boost corporate profits.
What’s more, tax cuts without commensurate spending cuts risk a revival of inflation. which could force the Fed to rethink its plan to continue reducing interest rates. The recent see-saw in Treasury yields reflects some of these concerns.
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