Why has the "Trump Trade" cooled off this time?

Correct figures, similar policies, why is the "Trump trade" in the 2.0 era "weak"?

Since last year's U.S. election, the S&P 500 index has basically shown a range-bound fluctuation, the 10-year U.S. Treasury yield has not experienced the significant surge seen during the Trump 1.0 era, and even the dollar's upward momentum has receded.

On February 17, Deutsche Bank analyst Henry Allen analyzed in a recent report the reasons why the market has failed to replicate the 2016 boom. Allen pointed out that changes in market expectations, differences in the economic environment, shifts in the Federal Reserve's policy stance, and adjustments to the timeline for implementing Trump’s policies have collectively led to this situation.

The market has fully priced in Trump's victory

The report noted that Trump's victory in 2016 was a huge "surprise" for the financial markets, as polls and forecasts generally favored Hillary Clinton, with FiveThirtyEight's final prediction giving Trump only a 28% chance of winning. However, by 2024, Trump's victory has been widely priced in, with Polymarket giving a 59% chance the day before the election. Deutsche Bank stated:

“Investors have experienced two elections in 2016 and 2020, where polls underestimated Trump's performance, thus they are cautious about the polling results for 2024.”

This means that the market has already digested most of the expectations for the "Trump trade" before the election. Analysts indicated that in the days leading up to the election, the traditional "Trump trade" would perform well with expectations of a Republican landslide, and vice versa.

U.S. stock valuations are high, growth potential is limited

From the stock market perspective, prior to the 2016 election, U.S. stocks performed poorly, with the S&P 500 index falling 0.7% in 2015 and only rising 4.0% by the end of October 2016. This was mainly due to slowing economic growth and the Federal Reserve starting to raise interest rates in December 2015.

However, before the 2024 election, U.S. stocks have experienced more than two years of strong gains. The S&P 500 index rose 24% in 2023 and has increased 19.6% by the end of October 2024. Moreover, in October 2024, the S&P 500's CAPE (cyclically adjusted price-to-earnings ratio) reached 36.85, far higher than the 26.54 in October 2016. Deutsche Bank pointed out:

“This means that compared to 2016, U.S. stock valuations are already high in 2024, with limited room for further increases. Additionally, while U.S. economic growth had slowed and began to recover in 2016, it has remained strong in 2024 (2.9% in 2023 and 2.8% in 2024). Therefore, it is not surprising that we do not see a repeat of the 2016 pattern.”

Monetary Policy Shifts to Easing, Tariff Policy Accelerates

In terms of policy, Trump's policy direction is similar to that of the 1.0 period, including tax cuts, deregulation, and increased tariffs. However, in 2016, Trump's victory triggered expectations for fiscal stimulus, leading to a tightening of Federal Reserve policy and pushing up U.S. Treasury yields. At that time, the Federal Reserve had just begun its rate hike cycle, raising rates for the first time in December 2015 and again in December 2016.

In contrast, in 2024, the Federal Reserve has shifted to a rate-cutting cycle, cutting rates by 50 basis points in September, with further cuts in November and December, and the dot plot in December indicates two more rate cuts in 2025. The report suggests:

“Given that the Federal Reserve has been reducing its restrictive policies, it is reasonable for the market to react differently. Additionally, compared to 2016, there is less idle capacity in the U.S. economy, making it more difficult to implement stimulus measures without generating inflationary pressures.”

Aside from the broader economic context, the government policy timeline in the 2.0 period is markedly different from that of Trump's 1.0 period. Analysts point out the most significant differences:

• The Trump administration immediately pushed for increased tariffs in its first month, including threats of a 25% tariff on Canada and Mexico (though currently postponed).

• In contrast, the Trump 1.0 period did not truly begin until his second year in office. Even then, the scale of threatened tariffs was not comparable to the scale being discussed this time.

The analysis suggests that this difference in policy implementation timelines has led to significantly different market volatility. In the first year of the Trump 1.0 period, market volatility was very low. The historical lowest closing level of the VIX index was actually in November 2017, when it closed at 9.14 points. In contrast, due to potential tariffs, the current financial markets have experienced significant volatility, especially in the assets of affected countries like Canada.

Risk Warning and Disclaimer

Markets are risky, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk