The market has already started placing 'deposits' on Trump's return to the White House. Since the end of September, with the continuous rise in Trump's approval rating, the market has begun to bet, with the significant appreciation of the US dollar index being seen as a representative. Behind this, there may be more concerns about the inflationary core and geopolitical 'impact' of Trump's policies, rather than focusing on pricing for trade frictions.

All trades result from the game between expectations and reality. If the market has already started pricing, we should pay more attention to those things in history and policy details. After all, during Trump's previous term, the US dollar index also experienced a sharp decline, and US bond yields did not always rise.

1. Deconstructing the historical experience of the 'Trump Trade'

If we directly look at the performance of major asset classes during Trump's last term (to avoid the impact of the epidemic, excluding 2020, the time frame is from 2017 to 2019), we will see a scene where both stocks and bonds are happy (see Figure 3), while the twists and complexities behind the process are filtered out.

One can also examine a typical period of the US-China trade friction (see Figure 4), which leads to the intuitive conclusion that one should go long on the US dollar, gold, and long-term bonds of developed countries, while avoiding emerging market stock markets.

To achieve a more granular division, we selected 2016Q4 to 2019 as the time period for the 'Trump Trade,' breaking it down from economic, policy, and market risk perspectives, and studying the performance of assets under different combinations (Figure 5).

1.1 How to make a more detailed division?

From an economic perspective, it is divided into economic cycles and relative economic performance. The former determines the overall economic situation and market sentiment, while the latter impacts the flow and preference of funds:

From an economic cycle perspective, the global economy has gone through a complete economic cycle. It hit bottom and rebounded in mid-2016, peaked in December 2017, and bottomed again in the second half of 2019 (Figure 6). Among the major economies, the U.S. economy showed stronger cyclical resilience, with a later peak and an earlier bottom.

In addition, from late 2016 to early 2017, a significant global and U.S. inflation shock occurred. Since the global economy was stabilizing back then, there were greater concerns about inflation in the market (even fears of stagflation). Therefore, we define the fourth quarter of 2016 to the beginning of 2017 as the inflation shock period.

In terms of relative economic performance, although the resilience of the USA economy's cycle is stronger, there are still differences in relative performance. As shown in Figure 8, in 2017, most of the time, against the backdrop of global synchronized recovery, the performance of USA economic data was weaker than global; in 2018, on the contrary, with global economic slowdown, USA performed better; in 2019, it was mixed, with the first half of the year USA being weaker and the second half USA experiencing an elastic economic recovery.

The division in monetary policy is relatively straightforward, from the end of 2016 to 2018 in a tightening phase of interest rate hikes (or interest rate hikes + balance sheet reduction), and in 2019, the policy shifted towards loosening. However, based on the tendencies in speeches by Federal Reserve officials and changes in market expectations, we chose March 2019 as the point of loosening (markets began expecting a rate cut later in the year in March), which was earlier than the actual rate cut starting in July.

In other policy areas, we mainly focus on the policy focus of the USA and the combination of government chambers (White House, Senate, and House of Representatives), as this will affect whether the overflow effects of USA policies on the global stage are positive or negative. Based on policy analysis, March 2018 was chosen as the dividing point for the USA government to shift focus from domestic to overseas, and on April 3, 2018, the Trump administration began announcing tariffs on Chinese imports. As for the government chambers, November 2018 was the dividing point, with the period before that being Republican-dominated and afterwards, the Democratic Party regained control of the House of Representatives.

Finally, we incorporate market risks and expectations into our analysis. According to data from a survey by Bank of America, in the second half of 2018 and beyond, trade frictions became the main market risk, while before that, concerns were more focused on geopolitics and policy mistakes.

Interestingly, from a hedging risk perspective, the most popular assets to combat trade frictions are not the USD, but technology stocks and US bonds.

How do assets perform in different time periods?

Based on the above dimensions, we divide from 2016Q4 to 2019 into five parts, which can serve as a reference for different scenarios of this year's U.S. election results:

2016Q4: Stagflation + Safe Haven

Economically, stagflation risks and concerns are rising: the global economy is in the early stage of stabilization, overall not strong, while inflation exceeds expectations significantly.

In terms of policy and politics, Trump unexpectedly elected, expansionary policy expectations rise; additionally, European risks increase, with Italy holding a constitutional referendum, triggering market concerns about the disintegration of the EU and banking crisis.

From the perspective of assets, investors are more conservative, favoring quality stocks and the U.S. dollar. Of course, December saw Europe pass through difficulties unscathed, with distinct reversal returns in European stock markets and bank stocks.

1.2.2 From Q2 of 2017 to the end of 2017: The "golden girl" moment of the global economy.

For global risk assets, perhaps the best combination is global economic recovery + poor relative performance of the US economy, which is the most typical economic portrayal of this stage. After digesting the first quarter, the shock of inflation has been basically absorbed. In the second half of 2017, the market began to worry about whether the central banks of Europe and the United States would tighten too much.

In terms of policy, the unified Republican government allowed the Trump administration to focus more on domestic tax cuts. Although the trade investigation on China began in August, it did not cause too much commotion.

In terms of assets, this stage, accompanied by the depreciation of the US dollar and the decline in long-term US bond yields, saw good performance of risk assets, with non-US markets and technology stocks performing particularly well in the stock market.

1.2.3 From Q2 of 2018 to the end of 2018: The 'nightmare' of risk assets.

During this period, it encountered multiple negative factors overlapping, resulting in abysmal asset performance:

Economically slowing down: The global economy has peaked and started to decline, but the US economy still has some remaining strength.

In terms of policy, tightening and trade friction: The fluctuation in oil prices and inflation at the beginning of the year have made the Fed hesitant to switch easily; starting April, the US plans to impose tariffs on $50 billion of imports from China.

On the asset side, the US dollar has significantly appreciated, and US Treasury yields remain high and difficult to decrease. Global risk assets have performed poorly, even gold is not spared from the downturn. In the stock market, only defensive sectors like healthcare and utilities have positive returns.

1.2.4 March to July 2019: Loose monetary policy + trade friction

The market finally gets to take a breather, with the biggest change being the acceleration of the US economy's decline, leading the Fed to adopt loose monetary policy.

On the economic front, the previously 'strong' US economy has begun to decline, and the pace of decline is faster than the global average.

Regarding policy, since March 2019, the market has been anticipating a mid-year rate cut, with Fed officials guiding towards easier monetary policy; however, the risks from trade friction are also increasing.

During this phase, the assets exhibit clear characteristics of rate cuts and risk aversion. Long duration bonds, gold, technology, consumer staples, and real estate stocks (interest rate sensitive) all performed well; under trade risks, European stocks outperformed emerging markets.

1.2.5 August to December 2019: Economic stabilization + reduced trade risks

Global economy is gradually stabilizing, as trade tensions have been repeatedly negotiated, leading to a dulling of market sentiment.

Economically, global easing ultimately stabilized the economy, and the US did not fall into recession due to Powell's sluggishness.

In terms of policies, due to the issue of tight US dollar liquidity caused by balance sheet reduction, besides initiating rate cuts, the Fed also restarted expanding its balance sheet. Although Trump has significantly expanded the scope of tariff imposition, after a year, market sentiment has dulled and the dawn of problem resolution is starting to emerge.

In terms of assets, the US dollar volatility, rate cuts, and easing remain important factors, leading to a noticeable rally, with emerging market stocks, previously in decline, showing a clear rebound.

Through the above review, it can be seen that different economic scenarios, policy combinations, and market expectations will lead to completely different market performance. The "Trump trade" is multidimensional, with the election being an important part but not everything. Currently, the current "Trump trade" actually resembles the fourth quarter of 2016.

What are the differences in the "2024 version" of Trump?

Compared to 2016, the similarities and differences between the 2024 Trump may mainly be reflected in two aspects: one is the advocated policy content, which is naturally the focus of attention; the other aspect is the change in Trump himself. In 2016, as a political rookie, Trump was very "sincere" on certain tough policies, while in 2024, as a political veteran, the extent to which Trump, who has started to "talk tough" in advance, may be worth paying more attention to.

Reflation is the most certain short-term core of Trump's policy, followed by tariffs. Analyzing the five key elements of Trump's policies: trade, tax cuts, immigration, deregulation, and relatively isolated geopolitical factors. The direct impact of the first three will weaken supply relative to demand, undoubtedly leading to an increase in the inflation level. On the contrary, tariffs that support industry reshoring have greater uncertainty in terms of how far they will be implemented.

From a fiscal perspective, in the scenario of a "Republican sweep", with the widening deficit, the probability of reflation increases. Trump will most likely prioritize pushing through tax reduction legislation in 2025, stimulating domestic demand and putting significant upward pressure on CPI; mass deportations of immigrants and additional tariffs will push inflation up from the supply side.

Of course, there are many uncertainties in Trump's policies. For example, about the US dollar, the Federal Reserve, and tariffs. From Trump's own statements, a weak dollar, a weak Fed, and high tariffs are his consistent claims. However, recently, Trump's 'economic advisor', potential Treasury Secretary candidate Scott Bessent, explicitly stated in an interview that if Trump is elected, he will not adopt a policy of weakening the US dollar, nor will he cut trade; tariffs are only seen as a negotiating strategy, and at least until the end of current Fed Chairman Powell's term, there will be no interference with the Fed's independence. How to view this difference? Is it repeating the turmoil and personnel changes in the White House as before, or will they really take a compromise approach like political veterans, this needs to be observed further.

"Trump Trade": How to price short-term and long-term?

The current 'Trump Trade' may be somewhat similar to the fourth quarter of 2016. Looking at the core of Trump's policies, the political and economic environment, and the current performance of assets, the current market is somewhat similar to the fourth quarter of 2016, but to a lesser extent. After the Fed cut interest rates by 50 basis points, there are signs of repeated inflation, but there is no clear fundamental validation signal yet, and commodities such as crude oil and copper are currently not strong; the situation in Israel and the Korean Peninsula is tense, but the impact on the economy and the market is not comparable to the EU disintegration/banking crisis. Looking ahead, inflation and geopolitics are worth monitoring.

The market acknowledges the re-inflation risks but may not pay much attention to tariffs. From the sensitive foreign exchange market perspective, the appreciation of the US dollar and the depreciation of the Renminbi partly reflect the market's risks of re-inflation behind Trump's policies and geopolitical tensions. However, the pricing of the tariffs advocated by Trump (10% global tariffs, 60% tariffs on China) is far from sufficient. For example, from 2018 to 2019, the Renminbi's depreciation relative to the US dollar and the increase in tariffs have a roughly equivalent static impact on export prices, while the current Renminbi exchange rate change is far from the tariff scenario envisioned by Trump.

Looking into next year, in addition to the presidency, it may be more important to consider the composition of the US Congress. From the current situation, apart from the presidency, the biggest uncertainty lies in the House of Representatives, while the probability of the Senate returning to Republican control is high. Therefore, if Trump takes office, there are two possibilities: a unified Republican Congress, or a President (Republican) + Senate (Republican) + House of Representatives (Democratic).

The unified Republican government, although the least likely scenario since World War II, may be the situation that the market would prefer to see. Historically, this scenario is relatively friendly to risk assets and commodities. By combining similar economic and policy scenarios, one can partially refer to the analysis from the second quarter of 2017 to the end of the year.

Economically, with various countries implementing loose monetary policies, the global economy may stabilize in the second quarter of next year. However, it is uncertain whether the resilience of other global economies will be better than that of the USA.

In terms of policy, the Republican government may focus more on dealing with the debt ceiling and extending the expiring tax reduction plans scheduled to end next year. The tariff policy may gradually enter the investigation and negotiation phases in the second half of the year. Regarding monetary policy, global central banks are likely to continue to maintain loose policies. The key factor is whether Trump will force the Fed to increase its easing measures (or create related expectations).

If the answer to both questions is yes, then 2025 may be a big year for risk assets, with a devaluation of the US dollar and strong performance in non-US markets. Growth and cyclical sectors are likely to perform well. If not, the US Dollar Index will likely fluctuate, with better stock market performance in the US, but may face style switching issues.

In this scenario, the main concern is whether the tariff process will accelerate. Apart from the time-consuming Section 301 investigations, the US government has other quicker methods for imposing tariffs. Through a presidential executive order, or declaring a national emergency, sanctions can be implemented promptly based on the International Emergency Economic Powers Act. Therefore, the risk of early tariffs does exist, but the above two scenarios seem more like 'policy bargaining chips,' and the probability of leading with an 'ace' is limited, so they are not considered as the baseline scenario. Of course, if the following scenario occurs, please refer to it:

The most common scenario under a Republican government is a divided Congress, but it may be the least favored situation in the market. Historically, in this scenario, the risk aversion sentiment is the strongest (US Treasuries and gold perform the best). Referring to the last term's review, the overall performance of major asset classes may be better than in 2018 but weaker than 2019:

A common point in the scenario of a divided Congress is the increased risks of tariffs and trade friction.

The reason for performing better than in 2018 is that under the at least easing shift, there are signs of stabilization in the economy.

The reason for the weakness in 2019 is mainly due to the significant uncertainty in tariff policies, and it is highly likely that indiscriminate 'harm' will occur at the beginning of the policy, such as imposing tariffs globally.

In the worst case scenario, excessive tariffs could lead to a 'hard landing' for the global economy. In that case, the performance of US bonds and gold is indeed worth looking forward to.

In a slightly better scenario, tariffs slowing down the stabilization of the global economy's pace. Apart from the bond market and gold, the performance of US stocks in the stock market may be better. A combination of technology, health care, or utilities is worth considering.

Risk warnings

1) The progress of the US election exceeds expectations. If Trump fails to win due to various reasons and Harris takes over the White House, the asset logic and the above content will be significantly different.

2) The deterioration of the US economy exceeds expectations. The reasons for the current US economic recession are still insufficient. If the fundamentals deteriorate beyond expectations and clearly signal a recession, it may affect the direction of US policy next year.

This article is a reprint from Chuan Yue Global Macro, author: Shao Xiang, edited by Zhì Tōng Finance and Economics: Chen Wenfang.