Wait, Just What Is the "Trump Trade"?
Prospects of a Republican sweep may have triggered some recent market moves, but the economic and political fundamentals are a much better guide for what's ahead
The combination of a debate meltdown and an assassination attempt have investors assuming that Republicans are about to sweep into power, and there’s lots of talk here and there and everywhere about the “Trump trade.” But with 109 days to go, this wild presidential campaign will surely bring more twists and surprises. And even if it were a sure bet that our 45th president will return as our 47th, it’s far from clear which asset prices will rise and which will fall.
Take a closer look at the market’s logic in recent days and consider how much of it can be solidly linked to the election.
Rising stocks: If you also believe that a new Trump Administration is committed to lower taxes, then you might expect a boost to future corporate earnings. But a strong economy and the prospect of Fed rate cuts probably explain current markets much better. The promise of lighter government regulation under Trump might explain why small-cap stocks that might benefit more from a lighter touch are catching up to the large caps. But you should probably already own these stocks because they are trading at significant discounts.
Falling Treasuries: If Trump’s policies are really pro-growth, they are also likely to be pro-inflation, especially in combination with higher tariffs and less immigration. This could be why the yield curve has steepened as long-term bond prices fall, but the large volume of bonds the U.S. Treasury still needs to place this year may be an even better explanation.
Weaker dollar: Trump and his advisors talk about the importance of weakening the dollar to boost exports, reduce the trade deficit and protect American manufacturing. But the trade-weighted dollar index is floating comfortably near the strong end of its recent range. It’s also not clear how any president could actually influence a $2 trillion daily spot market short of getting the Fed to print a lot more of dollars or deliberately triggering a recession that would force rate cuts.
“DRILL, BABY, DRILL”: Yes, this call to arms is capitalized in the Republican Party platform, so it deserves to be taken SERIOUSLY! Oil and gas stocks look like clear winners, but a weaker oil price may undermine those gains just as fast. Meanwhile, will Republicans really cancel subsidies already approved for solar panels and wind farms in their own districts?
Buy India, Sell China: This is probably a good bet under any outcome. Both parties seem headed for escalating tensions with Beijing even as they try to bolster ties to New Delhi.
Buy Saudi Arabia, Sell Mexico: Trump looks more committed to strengthening the relationship with the Kingdom, although it’s hard to play this through public markets. Mexican assets may turn more volatile if there is a real crackdown on the southern border, but Mexican assets will do well in any case if the U.S. manages a soft landing.
Buy Defense: Yes, but again the Pentagon’s budget is headed higher under any outcome.
Buy Banks: Maybe. These stocks rallied when Trump won unexpectedly in 2016 and may benefit from looser oversight, but neither Trump nor Vice Presidential nominee J.D. Vance are great friends of Wall Street.
But that’s not to say there aren’t clear ways to align your investment portfolio with a Trump victory if you think it’s a sure thing.
Bitcoin: Crypto assets are a great play, especially if a Republican-controlled Congress blocks expansive regulation of this budding industry.
Betting Markets: A Trump win now trades at 67 cents on Predict It.
Ticker DJT: Trump Media and Technology Group, which owns Truth Social, is perhaps the clearest beneficiary of all should the former president return to office. But recall that its current market cap of $7.7 billion rests on first quarter revenue of $770,000 and a negative cash flow of $9.3 million.
This is when the compliance department adds: “Past performance is no guarantee of future results.”
Sell Europe is another one that could be a Trump trade, but should have been on the list already.
(I’m only half joking.)