What is the Trump Trade?

Following the assassination attempt on former US president, Donald Trump, discussions about the Trump Trade have increased. The term Trump Trade describes the market reactions and investor behaviours related to Trump’s presidency. Initial market reactions included a modest rise in the US dollar and a slight increase in share prices, though these increases were limited.

What is the Trump Trade?

The Trump Trade refers to the market movements and investor behaviours influenced by the economic policies and political actions of a Donald Trump presidency. This term gained importance after his election in November 2016, when markets reacted to his promises of deregulation, tax cuts, and increased infrastructure spending. The Trump Trade reflects expectations of a pro-business environment and economic growth through fiscal policies.

To understand this concept and what markets might expect, we should examine how markets behaved during Trump’s previous presidency. This analysis will offer insights into past market dynamics and their potential implications for the future.

Pre-COVID market impacts of the Trump Trade 

Stock market

• Domestic stocks: U.S. equities, especially in sectors such as technology, financials, industrials, and energy, experienced significant gains. The Tax Cuts and Jobs Act of 2017, which cut corporate tax rates, provided a major boost for tech companies with large cash reserves overseas. This led to increased investments, stock buybacks, and higher dividends. From Trump’s election until the beginning of the COVID pandemic, the S&P increased by 62%.

• Healthcare: Healthcare stocks had a mixed performance. Biotechnology and pharmaceuticals saw gains, while health insurance companies faced challenges due to uncertainties around healthcare reform and attempts to replace the Affordable Care Act (ACA).

2. Fixed income markets

• Increasing yields: Treasury yields increased by 138 basis points, climbing from 1.85% in November 2016 to 3.25% in November 2018. By the end of 2018, yields began to decline as markets grew concerned about the risk of a recession due to tight monetary policies.

• Corporate bonds: The improved economic outlook led to a boost in the corporate bond markets, particularly high-yield bonds, as investors became more confident in the creditworthiness of companies. Junk bond credit spreads narrowed by 176 basis points, while investment grade corporate bonds saw spreads tighten by 43bps by early 2018.

3. Currencies

• Strong dollar: The U.S. dollar gained considerably against major currencies, driven by expectations of higher interest rates and stronger economic growth.

4. Commodities

• Industrial metals: Prices for industrial metals, such as copper, increased in anticipation of increased infrastructure spending.
• Oil prices: Oil prices remained stable due to expectations of deregulation in the energy sector.
• Gold prices: Gold prices initially increased as investors looked for safe-haven assets in response to uncertainties related to Trump’s policy changes, geopolitical tensions, and potential inflation due to fiscal stimulus and tax cuts. However, from 2018 to 2019, gold prices became volatile as the Fed continued to raise rates.

The Trump Trade impact on monetary policies

1. Interest rate hikes:

The Fed increased interest rates to prevent the economy from overheating, marking a shift from ultra-low interest rates since the 2008 financial crisis.

2. Balance sheet reduction:

The Fed also began reducing its balance sheet, which had expanded due to years of quantitative easing. This represented a significant shift towards monetary tightening.

Geopolitical effects of the Trump Trade

1. Trade tariffs:

Trump’s tariffs on Chinese goods and renegotiations of trade agreements like NAFTA (now USMCA), created global trade uncertainties. This led to market volatility, particularly for sectors dependent on international trade.

2. Global tensions:

The administration’s unpredictable foreign policy, including confrontations with North Korea and strained relations with traditional allies, increased geopolitical risks. Markets often reacted to developments in these tensions, reflecting the global interplay between economic and political stability.

3. Investment shifts:

Emerging markets, especially those with strong trade ties to the U.S., faced increased risk premiums. As a result, investors began reassessing their portfolios, preferring safer and more stable regions.

Portfolio implications of the Trump Trade

1. Equity allocation:

Increased exposure to domestic equities, especially in sectors set to benefit from deregulation and tax cuts, became preferable.

2. Fixed income strategy:

A cautious approach on long-term bonds due to rising yields and a preference for shorter-duration bonds to reduce interest rate risk.

3. Currency considerations:

Hedging strategies became more important for portfolios with substantial foreign exposure to shield against the strong dollar.

4. Geopolitical hedging:

Diversifying into assets that are less affected by U.S. political changes and including safe-haven assets, such as gold or Japanese yen.

What’s the best Trump Trade right now?

According to the latest Bloomberg Markets Live Pulse survey, gold is considered the best portfolio hedge if Donald Trump returns to the White House.

Among the 480 respondents, support for gold as a safe haven outnumbered those choosing the US dollar two-to-one. Over 60% of those surveyed expect the dollar to weaken if Trump wins another term.

Historical trends are on their side. A Bloomberg gauge of the dollar fell by more than 10%, while gold prices surged over 50% during Trump’s four years in office.

Trump’s policies of tax cuts, tariffs and weaker regulation are seen as inflationary on Wall Street and could even lead to the Federal Reserve increasing interest rates again. A red wave in November that ushers in Republican control of Congress, giving Trump greater power to implement his economic policies, could further boost gold prices, which are already near all-time highs.

According to Gregory Shearer, an analyst at JPMorgan Chase & Co “Gold sits in a prime position to rally.” Geopolitical tensions, a rising US deficit, reserve bank diversification and inflation hedging have all pushed up gold prices, “these factors likely endure regardless of the election outcome but could be further magnified under a Trump 2.0 or ‘red wave’ scenario,” he wrote on July 24.

Current views on the best Trump Trade

In the MLIV Pulse survey, many respondents seemed to agree: “All I can see are severe disruptions to markets and trade, and rapid increases” in the US national debt, one said.

Gold’s gains during Trump’s first term were partly driven by investors seeking safety as the Covid-19 pandemic hit and the federal funds rate fell to near zero. Gold, which pays no interest, reached a record high in August 2020 amid global lockdowns.

It wasn’t even the largest increase under any president in the past fifty years. Returns under George W. Bush and Jimmy Carter were greater.

Currently, the macro environment is again favorable for gold. The Fed is expected to cut interest rates in September, and central banks have been buying gold aggressively since 2022 to diversify away from the dollar.

Two-thirds of survey responders believe a Trump re-election could undermine the dollar’s status as the world’s reserve currency.

Kathryn Rooney Vera, chief market strategist at StoneX Group, says that a second Trump term might accelerate the move away from the dollar, with the private sector joining central banks in the rotation.

“Client portfolios are adding gold holdings. There’s a lot of expectations of a weaker dollar,” she said. “Technical, structural and fundamental factors are all supportive of gold.”

However, not all economists agree. Top Wall Street economists argue that a second Trump term might strengthen the dollar. Trump’s bias for harsher tariffs on US trading partners and deficit-boosting fiscal policies could disrupt the Fed’s anticipated interest-rate cuts.

MLIV Pulse respondents were divided on how Trump’s economic policies would affect the dollar. One respondent predicted a weaker dollar regardless of the election outcome: “Sustained high deficits and lower interest rates will push further de-dollarization and begin a sovereign debt crisis. It’ll be the same if Kamala Harris wins.”

The dollar and US Treasuries are typically seen as global havens during geopolitical stress. However, survey responses suggest that the greenback might not benefit from domestic political volatility.

“When the US is creating its own risk premium due to a potentially disorderly election, the fiscal implications of a Trump presidency, that makes the dollar in 2025 a risk,” said Kathleen Brooks, research director at XTB.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.