Source: Wall Street See
The previously heated "Trump trade" is cooling down, as Wall Street has realized that the impact of the policies promoted by Trump's campaign may be self-contradictory.
Wall Street is divided on the "Trump trade".
The so-called "Trump trade" refers to a series of investment operations conducted by investors based on their expectations of Trump's policies, typically including shorting long-term Treasury bonds, going long on cryptocurrencies, and investing in higher-risk stocks such as small caps. The logic behind it is that Trump's policies such as tax cuts, deregulation, and trade protectionism will have different effects on different asset classes.
The Trump trade is cooling off.
Although the "Trump trade" may sound reasonable in theory, investors don't seem to buy it. In Monday's US capital markets, the trend of the "Trump trade" was not sustained: the US Treasury yield curve flattened out, the US dollar fell, although the Russell 2000's performance remained slightly ahead of the S&P 500 at the close, this also means that there is dissent within Wall Street on the "Trump trade".
Some analysts have pointed out that there are still 4 months left to the November US election, and during this period, investors still have to digest a large number of US stock earnings reports, as well as two meetings of the US Federal Reserve. There will still be a lot of variables before the election results are announced, and continuing to hype the "Trump trade" now will be full of enormous uncertainties.
As Howard Marks, the founder of Oaktree Capital, noted in his latest investment memo on July 17th:
During the 2016 presidential election, almost everyone believed two things: 1. Hillary Clinton would win. 2. If Trump won the upset, the stock market would crash.
However, the result was that Trump won, and then the US stock market rose more than 30% in the following 14 months.
This proves two things: 1. People can't predict the direction of things in reality; 2. Nor do they know how the market will react after something happens.
Today's US election is even more uncertain: the Democratic presidential candidate is undecided, there is uncertainty from the Fed's policies to geopolitics and US stock valuations, making investment even more complicated.
This has caused Wall Street analysts and economists to differ greatly in their views on how Trump's election as president will affect the financial markets.
Wall Street's biggest difference comes from the fact that the impact of Trump's campaign policies may be contradictory. For example, his most popular tax cuts may push up inflation and interest rates, while his iconic tariff policy may suppress consumer spending and have a restraining effect on inflation. This contradiction makes it difficult for the market to form a consistent view on the "Trump trade".
Bank of America's survey shows that nearly three-quarters of respondents believe that if Trump wins the election, it will push up bond yields. However, Bank of America's own strategist, Michael Hartnett, does not agree with this result. He pointed out in a report last Thursday that one should not believe too much in this explanation of the Trump trade, as no government wants prices to rise continuously. The reality of the election is that voters believe inflation is their most pressing concern.
Chen Zhao, chief strategist at Alpine Macro, also points out that while tax cuts will push up long-term interest rates, Trump's favorite policy - tariffs, tend to have the opposite effect by squeezing consumer spending.
My view is that Trump's tax cuts are bearish for long-term bonds and his tariffs are bullish for bonds. But if Trump does both, it would be a huge mistake.
Regarding the views on the US dollar and bond yields, most strategists, including Deutsche Bank, Alpine Macro, and Barclays, believe that Trump's presidency will boost the US dollar. After all, investors tasted this flavor in his first term. At that time, after Trump won the election, the dollar initially rose along with bond yields, until his trade policy suppressed economic optimism.
However, economists at Jefferies, an investment bank, believe that if Trump applies political pressure on the Fed, the attractiveness of the US dollar as a wealth reserve may decrease (the US dollar will weaken).
Lindsay Rosner, Head of Fixed Income at Goldman Sachs, says that in any event, if Harris ultimately becomes the Democratic nominee and continues Biden’s policies, the yield curve may become steeper.
"Neither candidate has discussed any form of fiscal restraint, which has been priced in the yield curve." Many things have changed, so anchoring your investment portfolio to a specific outcome is not a prudent approach.
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According to Brian Jacobsen, Chief Economist of Annex Wealth Management, the best trade now is to invest in small-cap stocks, mainly because of their low valuations. Regardless of the political outcome, this is a good bet.
Therefore, in this complex situation, trading cannot be based solely on political headlines, but should be analyzed based on macroeconomic data and Federal Reserve policies.
Wolf von Rotberg, Stock Strategist at J. Safra Sarasin, said, "What really matters is the macro data we have now, and these data may change significantly before the November elections. We have seen a slowdown in the economic cycle. This will determine the interest rate space, and interest rates will have a more substantial impact on the stock market than politics."
As Howard Marks said:"The most important thing for investors is to manage risk, because we never know what the future holds."
Editor/Jadyen