As previously anticipated, the financial markets were abuzz in the first week after Trump's inauguration, but the nature of the excitement seemed different from what most investors had imagined.
The "Trump Trade," which was fervently discussed during last year's campaign—heavily investing in US stocks and the dollar while lightly allocating to international stocks and shorting US Treasuries—performed mediocrely over the past week. Indeed, US stocks rose, but not as much as the stock markets in Japan and Germany, and they even lagged behind some Emerging Markets. The dollar plummeted, and the US Treasury market was relatively quiet all week, with most yields quietly drifting lower.
Trump was quite busy in his first week as president: signing one executive order after another, holding impromptu press conferences, making faces in front of the cameras, and traveling across the USA, but the unexpected market reaction stemmed from one thing he did not do: immediately imposing tariffs on America's trading partners.
This was one of the promises he made during the campaign and a major pillar of Trump's trade theory: punitive tariffs would harm the economies of his opponents far more than the USA, leading to a substantial decline in their currencies against the dollar and reigniting inflation everywhere. This used to be the market's interpretation of "America First." However, at least in the past week, it seemed to be the exact opposite of 'America Last.'
"After the election, the preference for US assets quickly became a consensus in the market, but seeing no new tariff announcements in the first week following Trump's inauguration, we observed an improvement in sentiment toward international stocks and currencies," said Adam Phillips, Managing Director of Investments at EP Wealth Advisors. "The 'America First' trade took a little breather this week."
It needs to be emphasized that the US stock market did indeed see strong gains. The S&P 500 Index's increase of 1.7% marked the best performance during a new president's inauguration period since Ronald Reagan in 1985. However, for a stock market that has been on a steady rise for most of the past two years, such performance hardly stands out, and more importantly, compared to other markets, this trend was quite mediocre. The German stock market climbed by about 2.4%, Japan rose by 3.9%, and Mexico increased by about 5%.
Setting aside the overall market trends, the winners and losers of the new era are clearly visible. Oracle Corporation, which plays a significant role in Trump's billion-dollar AI investment plan, surged 14%, marking its largest gain in four months. After Trump promised to make NASA astronauts land on Mars, aerospace stocks jumped; however, after he asked the government to consider canceling subsidies for the electric vehicle industry, Tesla's stock fell.
As Trump's rhetoric on tariffs weakens, the dollar falls against major currencies. One indicator suggests that the dollar is set to record its largest weekly decline since November 2023, marking the worst performance for a new president in the early stages since the 1970s.
Emerging Markets currencies have seen the largest gains against the dollar, with the Colombian peso, Hungarian forint, and Polish zloty all increasing by over 3%. The logic behind this betting is that the trade threats from the White House currently serve mainly as a negotiation tool, aimed at forcing concessions from other countries.
U.S. Treasuries represent a rare quiet corner in the financial markets. In recent weeks, they were slightly boosted after being battered by concerns that the new government's agenda would expand government borrowing and push inflation higher. The 10-year yield has barely changed compared to a week ago, with the smallest fluctuation since September of last year.
Of course, Trump’s unpredictability is well-known; a single tweet can change everything. The new government's agenda—tax cuts, massive deregulation, governance of immigration, etc.—adds a layer of uncertainty to the market, which is obsessed with inflation trends. The conflicting goals embedded in the agenda inevitably confuse investors. For example, a large-scale deportation of undocumented immigrants could conflict with the goal of promoting economic growth without triggering inflation.
"Clearly pinpointing Trump’s all objectives remains a challenge," said Kathy Jones, Chief Fixed Income Strategist at Charles Schwab. "How can you lower inflation while imposing tariffs? How can you have a depreciating dollar alongside tariffs? It’s very difficult to achieve all three, and the market is waiting to see which one is the most important."
Although volatility in the stock and bond markets generally decreased during Trump's first week in office, a range of assets from the dollar to CSI Commodity Equity Index has indeed fluctuated due to Trump's statements. On Thursday, Trump informed world leaders at the meeting in Davos, Switzerland, that he would demand Saudi Arabia and other OPEC countries "lower oil costs," leading to an immediate drop in crude oil prices.
However, while attributing market fluctuations to news from the White House is tempting, there are larger forces at play: corporate earnings are once again exceeding Analyst expectations, highlighting that the U.S. economy shows no signs of slowing down.
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However, if we take Trump's first term as a guide, his various early actions should not be overly interpreted. In 2017, U.S. Treasury yields initially fell and U.S. stocks lagged behind overseas markets, but by the end of his term, the situation had reversed. For example, Trump may trigger a new round of market declines next week, at which time more executive orders will be issued, making the busy trading even busier due to the Federal Reserve's policy meeting and the large-cap technology earnings reports season.
But if a summary of the market movement in the first few trading days after Trump's return to the White House is to be made, it can be said that investors view Trump, the tax-cutting commander-in-chief, as a close ally of American businesses, and he may not act as an enemy to foreign companies as previously thought.
David Lefkowitz, head of U.S. equity business at UBS Group Global Wealth Management, pointed out that Trump's victory in last year's election was largely due to the inflation surge shortly after the Biden administration took office, which left many Americans feeling hurt. In a report, he wrote that this made Trump cautious about imposing tariffs, stating that "policies that further drive up prices will not be politically welcomed."
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