Source: Jin10 Data

After the assassination attempt against Donald Trump, his chances of winning the upcoming US election have also increased. This has led to the widespread concept of "Trump trade" in the market. What does this term mean? This article will help you understand! In order to understand this concept and the market expectations, we need to review the market reactions during Trump's previous presidency to gain a deeper understanding of past market dynamics and their impact on the future.

During Trump's previous presidency, "Trump trade" caused a rise in the US stock market, especially in the technology and financial sectors. The US Treasury bond yields rose, the credit spreads of corporate bonds narrowed, the value of the US Dollar soared, and the prices of industrial metals skyrocketed.

This time, Trump's victory may mean that the Federal Reserve may maintain a cautious attitude towards interest rate cuts, as a business-friendly environment may reaccelerate the US economy and exacerbate inflation. Trump's trade will urge investors to increase their investment in domestic US stocks, preferring short-term bonds, implementing hedging strategies against the strong dollar, and diversifying investments in safe-haven assets.

"Trump trade" refers to the market trend and investor behavior caused by the economic policies and political actions that Trump will promote if he is elected president again.

"Trump trade" is not a new term and was already of interest back in November 2016 when he was elected president. The market reacted to his promises to relax regulations, reduce taxes, and increase infrastructure spending. "Trump trade" mainly reflects expectations of a business-friendly environment and a significant boost to the US economy through fiscal stimuli.

"Trump trade" mainly reflects expectations of a business-friendly environment and a significant boost to the US economy through fiscal stimuli. Trump's promises to relax regulation, lower taxes, and increase infrastructure spending were positively perceived by the market, and most investors expected that policies favoring businesses and corporations would have a positive impact on the economy.

Market impact of "Trump trade" before the pandemic

1. Rise in US stocks: The US stock market, especially the technology, financial, industrial, and energy sectors, rose sharply. The 2017 Tax Cuts and Jobs Act cut corporate tax rates, which was a major bullish factor for tech companies, as many of these companies held large cash reserves overseas. Repatriating these funds boosted domestic investment, share buybacks, and increased dividends, further pushing up stock prices. From when Trump was elected president to before the outbreak of the coronavirus, the S&P 500 index rose by 62%.

2. Rise in US Treasury yields: Trump's election increased government spending and improved growth prospects, and the Federal Reserve's hawkish stance caused US Treasury yields to rise for two consecutive years. The yield on the 10-year Treasury bond rose by 138 basis points from 1.85% in November 2016 to 3.25% in November 2018. By the end of 2018, due to concerns about the risk of an economic recession caused by tight monetary policy, yields began to decline.

3. Corporate bonds: The significant improvement in the economic outlook boosted the US corporate bond market, especially high-yield bonds, because investors gained confidence in companies' creditworthiness. In the first two years of Trump's presidency, high-yield bond credit spreads tightened by 176 basis points, lower than government bond spreads of 308 basis points, reaching the lowest level since 2007. Meanwhile, investment-grade corporate bonds tightened by 43 basis points, down to 84 basis points. At the beginning of 2018, the scale of US government bonds reached its lowest level since 2007.

4. Strong US Dollar: Due to rising interest rates and expectations of strong economic growth, the US Dollar significantly appreciated against major currencies.

5. Mixed commodity performance: Industrial metals such as copper surged due to expectations of increased infrastructure spending, while oil prices showed resilience due to expectations of relaxed regulations in the energy industry. Due to uncertain factors such as Trump's policy changes, geopolitical tensions, and the inflation potential brought by fiscal stimuli and tax cuts, investors sought safe-haven assets. Gold prices rose in the early stages but became more volatile from 2018 to 2019, as the Federal Reserve continued to raise interest rates, putting pressure on non-yield assets.

The impact of "Trump trade" on monetary policy

To counter the positive expectations of the US economy during Trump's previous presidency, the Federal Reserve implemented the following policies:

1. Rate hikes: As economic growth and inflation expectations strengthened, the Fed tended to raise rates to prevent the economy from overheating, leading to a change from the ultra-low interest rate environment prevailing since the 2008 financial crisis.

2. Balance sheet reduction: The Fed also began considering the reduction of its asset purchases after years of quantitative easing, marking a significant shift towards monetary tightening.

The Geopolitical Impact of the "Trump Trade"

The Trump Trade is not just about economic policies, it also has significant geopolitical implications.

1. Trade Policy: Trump's protectionist stance, such as imposing tariffs on Chinese goods and renegotiating the North American Free Trade Agreement, has brought uncertainty to global trade. This has led to market volatility for markets that rely on international trade.

2. Global Tensions: The Trump administration's unpredictable foreign policy, including its confrontation with North Korea and tense relationships with traditional allies, has increased geopolitical risk. Markets often react to news of these tensions, reflective of the interdependence between global economic and political stability.

3. Investment Shifts: Emerging markets, especially those with close trade relations with the US, face increased risk premiums. Investors are re-evaluating their allocations to regions that are perceived as safer and more stable.

Impact of the "Trump Trade" Investment Portfolio

For investors' investment portfolios, the Trump Trade means reevaluation and rebalancing to adapt to the new economic landscape.

1. Equity Allocation: Increased investment in US stocks, particularly industries benefiting from deregulation and tax cuts.

2. Fixed Income Strategies: Due to rising yields, taking a cautious approach to long-term bonds and favoring short-term bonds to reduce interest rate risks.

3. Currency Considerations: For investment portfolios with significant foreign exchange exposure, hedging strategies become more important to guard against a stronger US dollar.

4. Geopolitical Hedging: Diversify investments, increase exposure to assets less sensitive to US political changes, and include safe-haven assets like gold or the yen.

If Trump Wins a Second Term? Who are the Winners and Losers

If Trump is successfully elected for a second term, some of the major beneficiaries are expected to be medical care, banks, cryptocurrencies, and petroleum stocks.

Trump has recently become a major supporter of Bitcoin and has claimed to be the crypto-friendly candidate. His campaign also accepts donations in Bitcoin, Ethereum, Dogecoin, Solana, and other cryptocurrencies. Trump has expressed his desire for all Bitcoin to be mined in the US and plans to speak at a Bitcoin conference later this month in Nashville.

The oil industry is also expected to benefit from Trump's presidency, given his long-standing support for the industry. According to reports, Trump proposed the repeal of Biden's environmental and electric car policies in May in exchange for $1 billion in campaign donations.

Goldman Sachs believes that 34 stocks could outperform the large cap during Trump's presidency, mostly because all of their sales come from the US market. This includes telecommunication sector stocks like Charter Communications (CHTR.O) and T-Mobile US (TMUS.O), retail stocks like Target (TGT.N) and Lowe's Companies (LOW.N), and banks like Wells Fargo & Co (WFC.N).

In addition, despite Trump's tough stance on electric vehicles, Musk officially supported the former president after the assassination attempt on Saturday. Musk has had contact with Trump in recent months. According to foreign media reports, Musk donated to Trump-supporting political action committees last week. Dan Ives, an analyst at Wedbush Securities who is bullish on Tesla in the long run, said Trump was bullish on the stock after taking office, but was negative about the electric vehicle industry.

The biggest losers are likely to be companies focused on clean energy like solar energy, as well as those heavily dependent on foreign trade or foreign-based companies trading in the US. Trump has criticized clean energy and Biden's inflation-cutting bill, which provides tax credits for solar panel installations and electric vehicle purchases. If Trump takes office in January and cancels these incentives, the solar and electric vehicle industries could take a hit.

Conclusion

Trump's trade summarises the significant changes in the market dynamics, which are driven by expectations of a more business-friendly environment, massive fiscal stimulus, and relaxed regulation. These changes affect various asset classes and impact currency policy and global geopolitics.

For investors, understanding and adapting to these changes is crucial to optimizing portfolio performance and mitigating risks associated with increased market volatility and geopolitical uncertainty.

Editor/Lambor