Catching the Trump Trade – and staying diversified

12 December 2024

Donald Trump’s US presidential election victory has hardly changed some predictions for the US stock market – Goldman Sachs still expects the S&P 500 to climb to 6,300 by November 2025, for example.^[1] But a second Trump presidency could still have big implications for specific sectors and asset classes.

Investors that want to pursue opportunities that they believe might emerge or even expand under the incoming administration can look to securities-backed financing to provide a convenient and cost-effective source of capital to back their convictions about the so-called “Trump trade.”

This term initially gained prominence after Donald Trump first won the presidency in November 2016, when markets anticipated a more pro-business environment — including deregulation and tax cuts — and a significant boost to the US economy through fiscal stimulus and increased infrastructure spending.

Similar expectations in the wake of Trump’s decisive victory in November 2024 have so far been a powerful driver of wealth creation for investors. The market also appears to be buoyed by predictions of an upcoming surge in mergers and acquisitions activity as interest rates continue to fall.^[2]

As of early December, the S&P 500 was up by more than 27% year-to-date and its forward price-to-earnings ratio was around 23,^[3] its highest premium to global equities for more than 20 years.^[4] The benchmark US stock index has touched new highs since 5 November, moving beyond the psychologically significant 6,000 mark, which, according to analysts, could persuade more investors currently sitting on the sidelines in money market funds and bonds to move into equities.^[5]

The US dollar, too, has risen strongly since October, in large part because of Trump’s promise to impose higher tariffs on imports. Because unemployment in the US is at record lows and there is limited capacity for US manufacturers to expand production, the appreciating dollar should help partially offset the decline in demand for imports as tariffs make them more expensive.^[6]

Bitcoin has also risen more than 50% since the election, closing in on $100,000, as investors expect more crypto-friendly regulation from the Trump administration.^[7] Trump’s pro-crypto comments mark a significant departure from the current ambiguous regulatory environment.^[8] Trump’s proposed crypto measures range from establishing a national Bitcoin reserve to expanding the Commodity Futures Trading Commission’s oversight of digital assets.^[9]

Negative impacts

Running counter to the general market optimism stoked by Trump’s victory are concerns over how the president-elect’s tax-cutting plans would increase the US’s $1.8 trillion Federal deficit and add to the country’s nearly $36 trillion of debt.

This has led to a sharp increase in the 10-year US Treasury bond yield from 3.6% in mid-September to around 4.2% by December, reflecting a higher cost of borrowing for the government.^[10]

Uncertainty over Trump’s trade policies has also hurt stocks in countries that may be subject to higher tariffs under the incoming administration. Stock benchmarks in Hong Kong and mainland China have fallen since 5 November, for example, while those in Australia and the UK are slightly higher.

Looking ahead, the impact of trade uncertainty could have a greater economic toll than the tariffs themselves, according to Goldman Sachs research.^[11] For example, during the trade conflicts of 2018-2019 in the first Trump administration, domestic-facing and defensive stocks such as utilities, telecoms and real estate tended to outperform, while suppliers of automobiles, capital goods and technology hardware underperformed.

Meanwhile, defence-related stocks in Japan and Korea are among the world’s best performing this year, reflecting a high degree of geopolitical uncertainty.^[12]

Lots of moving pieces

At the same time, it’s important to bear in mind that the S&P 500 may well have rallied no matter which candidate had won the US election: stocks typically rise after a presidential election because it marks the resolution of a major point of political uncertainty.^[13]

Politicians do not always deliver on their campaign promises. And although Trump did generally deliver on those that related to tax cuts and deregulation during his previous administration,^[14] that is no guarantee that he will do so again.

Investors are faced with a complex picture, even before the president-elect is inaugurated in late January 2025. US equities – and the US dollar – continue to pull away from the rest of the world, but macroeconomic and global trade concerns have been pushing up Treasury yields and volatility in other equity markets.

Global investors may be tempted to increase allocations to US equities, given the strength of the market’s performance. But the new administration is not yet in office, and the specifics of its policies are not yet clear. The transition to a new US administration always increases unpredictability – and this one does so more than most given the extent to which many of the president-elect’s proposed policies break with tradition.

In this uncertain environment, other asset classes may come back into favour as the political situation changes. Investors wanting to keep their options open and be able to react nimbly to evolving market conditions may wish to consider securities-backed financing, which allows them to raise capital to rebalance portfolios or pursue new opportunities in the US while retaining exposure to core shareholdings in other markets.

[1] https://www.goldmansachs.com/insights/articles/how-trumps-election-is-forecast-to-affect-us-stocks

[2] https://www.rwbaird.com/corporations-and-institutions/investment-banking/insights/2024/09/fed-rate-cuts-a-catalyst-for-ma-activity/

[3] https://en.macromicro.me/charts/88416/US-S-P-500-Forward-PE-Ratio-plus-MA

[4] https://www.reuters.com/world/us/trumps-return-could-extend-us-stocks-dominance-over-global-rivals-2024-11-22/

[5] https://www.bloomberg.com/news/articles/2024-11-07/stock-market-today-dow-s-p-live-updates

[6] https://www.ft.com/content/7b97f48b-87e2-4cb3-bd3c-4e963356f109

[7] https://www.ft.com/content/f50e6936-af3c-4066-9b4b-41797549541b

[8] https://omm.com/insights/alerts-publications/the-ever-shifting-landscape-of-us-crypto-regulation/

[9] https://www.benzinga.com/government/regulations/24/12/42261013/as-bitcoin-surges-coinbase-exec-expects-swift-legislation-thanks-to-trump-and-the-most-pro-crypto-congress-ever

[10] https://www.cnbc.com/quotes/US10Y

[11] https://www.goldmansachs.com/insights/articles/how-trumps-election-is-forecast-to-affect-us-stocks

[12] https://on.ft.com/4fUDkM4

[13] https://www.cnbc.com/2024/11/04/what-the-stock-market-typically-does-after-the-us-election-according-to-history.html

[14] https://www.bbc.com/news/world-us-canada-37982000

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