One month after Trump took office, traders have abandoned bets on America First

Media reports indicate that a month has passed since Trump's second presidential term began, and the excitement among investors that surged after his victory in November is now fading. From U.S. stocks to the dollar to Bitcoin, various assets that investors previously bet on are now underperforming.

According to Bloomberg News, the S&P 500 Index reached an all-time high, but its performance still lags behind benchmark indices in Europe, China, and Mexico. The strength of the dollar and bearish trades on U.S. Treasury bonds are also cooling down, and even cryptocurrencies and related stocks, which had previously surged, have retreated.

This is not the scenario investors anticipated after the November 5 election. At that time, a wave of risk appetite swept through the market, driving stocks, the dollar, Treasury yields, and Bitcoin to soar. Investors expected that Trump's promised deregulation, tax cuts, and protectionist policies would stimulate economic growth and inflation.

However, in contrast, investors indicate that the hallmark of his first month in office is a dizzying array of tariff threats. This week, Trump announced the possibility of imposing about 25% tariffs on imports of automobiles, semiconductors, and pharmaceuticals, further escalating his trade war.

Over the past month, investor sentiment has gradually turned pessimistic, with growing concerns that tariffs could exacerbate inflation, hinder further interest rate cuts by the Federal Reserve, and drag down economic growth.

Eric Diton, president of Wealth Alliance, stated:

“The initial market optimism was overstated, and investors did not truly think it through.”

Small-Cap Stocks Open High but Close Low

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

Investors bet on these companies, which primarily target the domestic market, expecting them to be the main beneficiaries of the Trump administration's support for the domestic economy and tariffs on foreign goods. The day after the election, the Russell 2000 Index surged 5.8%, marking the largest single-day gain in three years. However, by the end of November, the index had peaked and is now only about 1% higher than its closing price on November 5.

Analysts believe that small and mid-cap stocks were originally expected to shine during Trump's second term, as they are less affected by the trade war. However, due to high interest rates putting pressure on heavily indebted small and mid-sized enterprises, their performance has lagged behind large-cap stocks.

Energy and financial stocks also received attention after Trump's victory. The S&P 500 Energy Index briefly rebounded after the election but has since given back all its gains, remaining flat compared to its level on November 5, similar to oil prices. Meanwhile, the S&P 500 Financials Index rose 12%, primarily driven by strong bank earnings.

Analysts say investors have high hopes for the financial sector, anticipating increased deregulation and merger activity. However, Trump's antitrust enforcement team has indicated that it will continue the Biden administration's strict merger review rules, which has cooled investor expectations for industry mergers

Dollar Peaks

As one of the most representative macro investment strategies of the Trump trade, betting on a stronger dollar is now cooling down. Investors previously believed that tariffs would drive up inflation and raise U.S. Treasury yields, thereby supporting the dollar.

The Bloomberg Dollar Spot Index rose about 4.5% from the day of the U.S. election to January 15, but has since fallen about 1.5%.

Traders say that part of the reason the dollar has lost momentum is that the market overestimated the positive impact of tariffs on the dollar. Although trade war-related news continues to cause market fluctuations, such as Trump's announcement of a 25% tariff on imports from Canada and Mexico before February 1, which led to the depreciation of the Mexican peso and the Canadian dollar, the exchange rates quickly rebounded after he suspended these tariffs.

At the same time, trades betting on rising U.S. Treasury yields and a steepening yield curve are closely related to dollar long positions. The market originally believed that Trump's promised tax cuts, combined with inflationary pressures from tariffs, would weigh on the bond market and push yields higher. From the two-year to the ten-year U.S. Treasury yield curve, it steepened sharply from November last year to early January this year, reaching its highest level in over two years. Some investors expect that the expanding fiscal deficit will force the government to increase its borrowing.

However, the Trump administration's Treasury Department has hinted that it will maintain the current scale of Treasury issuance in the short term. This policy, along with the government's commitment to cut spending, has alleviated market concerns about the federal deficit, pushing long-term yields down over the past month.

Guneet Dhingra, head of U.S. interest rate strategy at BNP Paribas, stated:

“Before and after the election, bond market investors were frantically betting on the ‘bond market bearish Trump trade.’ But if you look at the trends since the election, the situation is exactly the opposite; the yield curve is flattening.”

Cryptocurrency Frenzy Cools

After the U.S. election, crypto assets surged, as the market generally believed that the Trump administration would adopt a more favorable regulatory policy towards the industry.

However, the momentum of cryptocurrencies has clearly slowed down due to a lack of new policy benefits. For example, Trump promised to establish a "national Bitcoin reserve" during his campaign, but this plan has yet to be implemented. David Sacks, the White House official responsible for cryptocurrency and artificial intelligence policy, stated this month that the internal working group is still studying the feasibility of the plan.

Bitcoin rose about 50% in the two months following the U.S. election, but has fallen back after breaking $100,000 in January, dropping to below $98,000 as of Thursday afternoon. Matthew Hougan, Chief Investment Officer of Bitwise, stated, “The sentiment in the crypto market is extremely low right now.”