Currently, US stocks are showing an upward trend driven by “Trump's put options.”

On Friday, the Dow Jones Industrial Average rose 1%, the S&P 500 rose 0.3%, and the Russell 2000 Index rose 1.8%. US small-cap stocks performed particularly well this week. The small-cap index surged 4.5% this week.

Fundstrat analyst Thomas Lee believes that considering President-elect Trump's deregulation plan and the “animal spirit” that currently prevails in the US stock market, there is room for further growth in small-cap stocks and cyclical stocks.

The so-called “Trump put option” refers to the market's general expectation that Trump will not cause the stock market to fall sharply.

As mentioned in the previous article, this stems from Trump's unique style of administration: he is very concerned about S&P trends and sees stock market performance as an important indicator of the effectiveness of administration. Whenever the S&P index falls sharply, he quickly adjusts his policy direction.

David Bahnsen, founder of the Bahnsen Group, believes that Trump's emphasis on financial markets stems from his desire for recognition by Manhattan's financial elite:

“He always wanted to be part of Manhattan's financial elite, but he always felt like an outsider.”

Therefore, the market expects that after coming to power, he will introduce a series of favorable policies, including measures such as drastically reducing corporate tax rates and easing financial regulations, which further strengthens the market influence of “Trump's put options.” In other words, the US stock market is “gambling” that Trump will never tolerate a stock market crash.

Is “Trump put options” making a comeback?

Wall Street's optimism about Trump's return is mainly based on the following expectations:

First, favorable policies. Markets expect Trump to introduce favorable policies, including lowering the corporate tax rate (from 21% to 15%) and drastic deregulation (abolishing 10 old rules every time a new rule is introduced). Meanwhile, he promised to replace US Securities and Exchange Commission (SEC) Chairman Gary Gensler (Gary Gensler) on his first day in office. Some Wall Street executives expect that, driven by deregulation and other measures, the banking industry will usher in more opportunities for mergers and acquisitions.

Second, personal characteristics. David Bahnsen of the Bahnsen Group ($65 billion in assets under management) believes that Trump's emphasis on financial markets stems from his desire for recognition by Manhattan's financial elite. Throughout his life, he felt like an outsider to Manhattan and never received the recognition and respect he deserved.” To some extent, this psychological characteristic has become a “safety cushion” for the market.

Third, policy expectations are moderate. The famous economist Roubini (“Doctor Doom”) and others believe that Trump's focus on the market, combined with an appropriate team of advisors, may make his actual policies “more moderate.”

However, not everyone is convinced of “Trump's put options.” Mark Zandi, chief economist at Moody's Analytics, warned that excessive market optimism is pushing stock prices too high and could lead to a “liquidation day.” Some experts worry that Trump's massive expulsion of immigrants and huge tariffs could have a negative impact on the labor market and economy.

Furthermore, Tom Glocer, chief independent director of Morgan Stanley, warned that Trump's capricious political style may also cause market fluctuations; for example, if he refuses to step down after his second term ends, the market may fall into chaos.

Source of this article is “Wall Street News”, author Gao Zhimou, editor of Zhitong Finance: Chen Qiuda.