November 8, 2024
I asked AI for an objective description of the Trump trade.
The “Trump trade” generally refers to investment trends or market reactions expected to follow Donald Trump’s election as President of the United States in 2024 based on his campaign platform and the market performance related to his 2016 election. It describes a range of financial market behaviors and sector-specific movements driven by Trump’s policies and agenda, particularly regarding tax cuts, deregulation, infrastructure spending, and trade policies. Here’s a breakdown of what it involved:
1. Continuation of Tax and Deregulation Policies
- Potential for Corporate Tax Adjustments:
- Trump may push to further reduce corporate taxes or extend the benefits of the 2017 tax cuts, which could lift stocks in sectors with high U.S.-based revenues.
- Deregulation Resurgence:
- A return to the deregulatory approach in industries like energy, financials, and manufacturing would likely benefit these sectors by reducing compliance costs, potentially boosting profitability.
2. Strengthening U.S. Manufacturing and Energy Independence
- Domestic Production Focus:
- Trump’s agenda is expected to include policies to increase domestic manufacturing, especially in strategic sectors (e.g., semiconductors and pharmaceuticals).
- Companies involved in these industries might see positive impacts, particularly if Trump supports tax incentives for U.S.-based production.
- Energy Policy:
- A pro-energy stance could favor oil, gas, and coal sectors while decreasing regulatory pressures on fossil fuel production and pipelines.
3. Implications of Trade Policies and Tariffs
- Revisiting Trade Relations, Particularly with China:
- If Trump continues his prior trade approach, we could see renewed tariffs or trade barriers to protect U.S. industries but potentially add volatility for multinational companies.
- Investment in Strategic Partners and Trade Deals:
- He might focus on reshaping U.S. trade agreements, potentially supporting industries aligned with allies and discouraging reliance on specific countries for critical materials.
4. Infrastructure and Defense Spending
- Infrastructure Investment:
- Although previous infrastructure promises saw limited realization, renewed efforts might focus on critical infrastructure such as transportation, communications, and defense.
- Stocks in the construction, materials, and defense sectors could grow if Trump advances federal investment in these areas.
- Increased Defense Budget:
- Trump’s approach could prioritize defense spending, benefiting contractors and companies in aerospace, defense, and cybersecurity.
5. Sector and Stock Impact
- Industrial, Financial, and Energy Sectors:
- These sectors would likely be favored based on expectations for reduced regulation and policies promoting domestic industry.
- Defense and Technology Sectors:
- Increased defense spending could boost this sector, while tech might face more challenges in global markets if trade tensions escalate.
- Small-Cap and U.S.-Focused Companies:
- With an “America First” policy orientation, small- and mid-cap U.S.-centric companies could experience an increase in investor interest.
6. Challenges and Risks
- Market Volatility:
- Increased tariffs or trade tensions with major trading partners could lead to market volatility, impacting companies reliant on global supply chains.
- Fiscal Concerns:
- Proposals for significant tax cuts or spending increases could elevate federal debt levels, potentially affecting the bond market and long-term fiscal stability.
In Summary: The 2024 Trump trade would likely center around a blend of corporate tax policy, deregulation, pro-energy initiatives, trade protections, and sector-specific boosts to infrastructure and defense. As with the 2016-2020 Trump trade, it would create opportunities in specific sectors while also increasing market risks related to trade tensions and fiscal deficit growth.
From my perspective, the preceding write-up from AI is quite accurate; however, there are a few points to remember.
- The equity market was excessively overvalued on election day. With enthusiastic market sentiment following Trump’s win, most prices have soared, and capital risk has increased.
- The broad trend and cycles of financial markets will evolve regardless of who won the 2024 election. My prior opinion that equity markets will encounter extreme selling in 1Q2025 has not changed.
- Silicon Valley leaders like Elon Musk and Peter Thiel played an important role in the Trump election win. Accordingly, the Trump quid pro quo will be that companies related to Silicon Valley and Texas, especially Musk’s interests, will benefit significantly.
- Following a major sell-off in equities, I believe investors should focus on technology, defense, energy, and financial companies. Consumer and healthcare sector companies will likely substantially underperform in 2025-2026.