Why has the "Trump trade" gradually "cooled off" after a month of taking office?

According to the Zhitong Finance APP, it has been a month since President Donald Trump began his second term. Following his victory in November last year, investors flocked to various trades from U.S. stocks to the dollar and Bitcoin, but now the related optimism is gradually fading.

The S&P 500 index has not met the high expectations previously placed by the market, continuing to lag behind benchmark indices in Europe, China, and Mexico despite its record gains. Expectations of a strong dollar and bearish bets on U.S. Treasuries are losing momentum. Even the astonishing rise of cryptocurrencies and their concept stocks has waned.

This is in stark contrast to the direction investors anticipated right after the election on November 5. At that time, the election triggered a wave of venture capital enthusiasm, driving up stocks, the dollar, U.S. Treasury yields, and Bitcoin. Investors bet that a series of policy combinations promised by Trump, such as deregulation, tax cuts, and protectionist measures, would ignite U.S. economic growth and inflation.

However, investors indicate that the hallmark of Trump's first 30 days in office has been a dazzling blitz of tariff threats. The latest occurred this week when the president stated he might impose tariffs of about 25% on imports of automobiles, semiconductors, and pharmaceuticals, which could expand the trade war he initiated.

In the past month, investor sentiment has become increasingly pessimistic, with concerns that tariffs may trigger inflation more quickly, hinder further interest rate cuts by the Federal Reserve, and put pressure on U.S. economic growth.

Eric Ditton, president of Wealth Alliance, stated, "Investors (previously) did not really think deeply and were overly optimistic."

Here is the performance of the "Trump trade" across various assets one month after the inauguration:

Small-cap Stocks Reverse Trend

After Trump's victory, the biggest winners in U.S. stocks were small-cap stocks.

Investors bet that these companies, which are typically more focused on the domestic market, would become major beneficiaries of a government hoping to boost the economy and protect domestic businesses through tariffs. The day after the election, the Russell 2000 index, which tracks small-cap stocks, surged 5.8%, marking the largest increase in three years. However, the index peaked at the end of November and is currently only about 1% higher than its closing price on November 5.

"It is expected that small and mid-cap stocks will shine during Trump's second term, as these asset classes are less affected by potential trade wars," said Eric Sterner, Chief Investment Officer at Apollo Wealth.

He noted that small-cap stocks have struggled to keep pace with large-cap stocks, as rising interest rates have put pressure on smaller companies, which typically carry heavier debt burdens.

After Trump's victory, energy and financial stocks also became focal points. The S&P 500 Energy Index rose immediately after the election but then retraced its gains and is currently roughly flat compared to the level on November 5, mirroring oil price trends. On the other hand, driven by robust bank earnings, the S&P 500 Financial Index rose by 12%.

"Due to deregulation and the potential increase in merger and acquisition activity, investors have high hopes for this sector, but the strongest driving force remains earnings," Sterner stated. The outlook for a more favorable deal environment seems dimmer as the Trump administration's antitrust enforcement agencies indicated they would adhere to stricter merger review rules passed during Biden's term Of course, some stock investments have performed as expected. As the government basically maintains its support for fossil fuels, the stock prices of renewable energy companies have declined.

Dollar Peaks

One of the strongest macro performances of the "Trump trade" has been the long position on the dollar, partly due to the belief that tariffs would reignite inflation and push up U.S. Treasury yields, a trend that has gradually faded. The Bloomberg Dollar Spot Index rose about 4.5% from election day to January 15. However, since then, the index has fallen about 1.5%.

Traders say one reason the dollar has lost upward momentum is that the market overestimated the positive impact of tariffs on the dollar before Trump's inauguration. However, the tariff proposals still triggered significant turmoil in the currency markets. For example, President Trump vowed to impose a 25% tariff on imports from Canada and Mexico by February 1, which pressured the Mexican peso and the Canadian dollar, but after he suspended these tariffs, the movements of these currencies quickly reversed.

Kyle Chapman, a foreign exchange market analyst at Baring Asset Management in London, stated, "Those expecting the 'Trump trade' to continue have been disappointed."

U.S. Treasury Yield Curve Flattens

Bets on rising U.S. Treasury yields and a steepening yield curve were once closely linked to long dollar trades. The logic behind this was that Trump's promised tax cuts, combined with inflationary impulses from tariffs, would put pressure on the bond market.

From November last year to early January this year, the yield curve for U.S. Treasuries from 2-year to 10-year sharply steepened, reaching its highest level in over two years. Part of the bets were based on the expectation that as the U.S. deficit expands, the government would have to increase bond issuance.

However, it has been shown that the U.S. Treasury Department under the Trump administration plans to maintain stable bond issuance, combined with the government's commitment to cut spending, which has alleviated some concerns about the federal deficit and pushed long-term U.S. Treasury yields down over the past month.

Guneet Dhingra, head of U.S. interest rate strategy at BNP Paribas in New York, said, "Before and after the election, we saw this 'Trump trade' led by bond market investors," adding, "But if you look at the situation since the inauguration, it has been completely the opposite; the yield curve has been flattening."

Cryptocurrency Hype Cools

After the election, crypto assets surged significantly, as the industry had fully supported Trump during the campaign, and Trump had repeatedly promised to create a more favorable regulatory environment.

However, with not much new progress to sustain the upward momentum, these gains have moderated. For example, Trump promised to create a national Bitcoin reserve during his campaign, but this plan has not materialized. David Sacks, the White House's cryptocurrency and AI czar, stated this month that a working group within the government needs to study the feasibility of the plan.

In the two months following the election, Bitcoin rose about 50%. However, after peaking above $100,000 in January, Bitcoin's price had fallen to below $97,000 by Wednesday afternoon New York time. Scandals related to meme coins like Libra have also weakened investor interest in cryptocurrencies.

Matthew Hogan, Chief Investment Officer at Bitwise, stated, "The current sentiment in the cryptocurrency market is extremely negative."