Trump effect on market: the economic landscape has been significantly influenced by Donald Trump's policies and negotiations, often referred to as the "Trump Effect."
The current state of Trump’s trades might echo a familiar Wall Street adage: "Buy the rumor, sell the news." The so-called Trump trades, which gained popularity at the end of last year, have encountered significant challenges as we move into 2025.
Investors had high hopes for Trump's second term, anticipating that:
Stock Market Surge: The stock market would soar due to tax cuts and deregulation.
Rising Costs and Rates: Tariffs would lead to increased consumer costs, causing slow rises in interest rates and inflation.
Strengthening Dollar: The dollar would continue to climb, supported by persistently high interest rates.
However, reality has not aligned with these expectations. Trump's erratic approach to trade policies has led to a stock market performance that falls short of projections, leaving investors in a state of uncertainty about whether his latest proposals would become irrelevant in a matter of minutes.
Despite an unexpectedly strong inflation report in January that boosted yields and the dollar, both have remained relatively flat this year, while U.S. stocks have narrowed their gains. This suggests that the Trump trades are struggling to gain traction.
1. Stocks
Expectation: With the Trump administration's focus on tax cuts, deregulation, and lowering energy costs, the stock market was expected to continue its upward trajectory.
Reality: While the S&P 500 has risen approximately 3% year-to-date, it lags behind international counterparts, with the MSCI World Index (excluding the U.S.) rising around 5% in the same period.
Analysis of Stock Performance
Steve Sosnick, chief strategist at Interactive Brokers, noted, “It’s clear that the regulatory environment is moving toward a more lenient direction, but initial reforms were implemented too quickly, leading courts to indefinitely delay many projects.”
Moreover, stocks and assets linked to Trump trades have been hit hard. As of Tuesday, shares of Trump Media & Technology Group (DJT) and Tesla (TSLA) fell by 11% and 19%, respectively. Trump’s meme coin made nearly $100 million, bitcoin skyrocketed to six figures shortly after the election, has stalled, showing only a 3% increase this year as policy announcements have failed to act as catalysts for further gains.
2. Bond Yields
Expectation: The prospect of mass deportations and aggressive tariffs was anticipated to fuel inflation, which could hinder the Fed's ability to lower interest rates and even raise the likelihood of rate hikes.
Reality: Since the beginning of the year, the yield on 10-year U.S. Treasuries has slightly decreased, recently dropping from 4.57% to 4.42%. The likelihood of the Fed cutting rates has increased, with the potential for up to two cuts this year. Following an unexpectedly high inflation report in January, yields did rise by 11 basis points on Wednesday.
3. The Dollar
Expectation: Due to the protectionist trade policies of the Trump administration, the dollar was expected to rise relative to other currencies.
Reality: The dollar index, which measures the dollar's value against a basket of foreign currencies, has declined by approximately 0.4% year-to-date, despite a recent uptick following the inflation data release on Wednesday.
Sosnick remarked, “Tariffs were thought to be beneficial for the dollar, but the sporadic nature of key announcements has undermined that rebound.”
Sosnick emphasizes that the current state of Trump trades illustrates the Wall Street adage of "buy the rumor, sell the news." He explains, “The market is very adept at predicting potential benefits, whether from the government or corporations. However, if the timeline for realizing those benefits is longer than expected, disappointment can set in.”
Investor Sentiment
This sentiment encapsulates the current scenario. Even a seemingly efficient government may not meet impatient investors' highest expectations, leading to a sense of disillusionment.
As we assess the current status of Trump’s trades, it becomes evident that the initial optimism has collided with the complexities of implementation and external factors. Investors must navigate a landscape filled with uncertainties, reflecting the age-old wisdom of Wall Street. The future remains unpredictable, with potential opportunities and challenges continuing to unfold.
When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.
Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
