Playing the Trump trade 2.0

It's two weeks since Donald Trump's historic election win and his re-election has had a significant impact on global investment markets. As such, there have been clear winners and losers as investors rush into assets that are perceived to have the best chance of performing well during Trump's second term in office, the so-called "Trump trade 2.0". A good example is the US dollar which has rallied more than 3% against other major currencies (based upon the US dollar index).

But the reality is that Trump's unpredictable nature makes it difficult to be certain what assets will outperform in the coming months, or what might lag. That does make taking advantage of the Trump trade 2.0 difficult. However, back in 2016, also exactly 2 weeks after Trump's election win, I published an investment research piece titled "Will the Trump trade fade?".

In it I looked at how markets initially reacted to Trump’s election win in 2016 (and the original Trump trade) as well as the outlook for markets. Now, with the benefit of hindsight, we can compare the post-election market reactions of 2016 and 2024 as well as examine Trump’s entire first presidency to gain insights into how assets might perform during his second.

What was the Trump trade in 2016?

The initial two weeks following Trump’s 2016 election saw sharp and uneven market reactions:

Sector-specific gains

• Financials led the charge with a 10.7% increase, fuelled by expectations of higher interest rates and reduced regulation.
• Industrials and materials rose on infrastructure spending hopes.
• Consumer staples, utilities, and real estate lagged, as these traditionally defensive sectors lost appeal after Trump's fiscal plans were judged to be inflationary and likely to cause the US Federal Reserve to raise interest rates.

Rotation from bonds to equities

• The bond market faced its steepest sell-off in 16 years, reflecting fears of higher inflation and rates. Meanwhile, equity markets rallied, led by cyclical and growth-oriented sectors.

Currency moves

• The US dollar strengthened sharply, impacting emerging markets and commodity prices initially. Japanese equities gained as the yen weakened, boosting export-oriented companies.

Tech divergence

• While biotech stocks surged on hopes of cash repatriation and looser regulations, large-cap tech names like Amazon and Facebook struggled due to Trump’s critical rhetoric toward Silicon Valley.

Emerging market weakness

• Protectionist trade policies and a strong dollar hit emerging market equities and currencies, with emerging market bonds experiencing a sharp sell-off.

Trump trade 2.0

The chart below shows the performance of the US stock market (S&P 500) in the two weeks following the 2024 US election result. The green line shows how the US stock market initially surged 5% before plateauing, yet remains elevated.

Best and worst performing fund sectors since the 2024 US election

The table below shows how fund sectors have fared since the 2024 US Election result was announced. The first column shows the performance of assets in the initial surge up until the 11th November, while the second column looks at the performance over the 2 weeks post-election and up to the date on which this research was compiled.

This table highlights how the market thinks that Trump will be good for US equities yet bad for bonds and emerging markets (the latter due to his protectionist views). The rising dollar vs yen has been good for Japanese equities because when the yen falls the export-heavy Japanese stock market tends to rally. It is interesting to note how healthcare stocks and European Smaller Companies stocks took significant turns for the worse in the last week. Healthcare stocks were hit by speculation that Trump may announce a well-known anti-vaxer to serve as US Health Secretary. Meanwhile, European equities have been hit by speculation of trade tariffs being imposed by Trump on some European exports. It's a case of news/speculation driving markets rather than facts and fundamentals.

The Trump trade 2.0 is uneven

If we focus just on US stocks for a moment, the Trump trade 2.0 is uneven, much like in 2016. However, in 2016 Trump was elected on the promise of large-scale infrastructure spending which bolstered Industrials and Materials stocks. This is not the case in 2024. Financials are the best performing stocks again, based on the hope of lighter regulation, but in 2024 Consumer Discretionary is a close second. That is in a large part due to the surge in Tesla's share price thanks to Elon Musk's influence over the incoming president

Will the Trump trade fade or strengthen?

Before Inauguration Day

With the benefit of hindsight we can now look back at Trump's first presidency and look at the performance of different assets. The table below shows the performance of different unit trust sectors during the first couple of weeks after his 2016 election win and then up to the date of Trump's inauguration (the second column) in January 2017. If you compare the table below with the earlier 2024 performance table you can see there are similarities. North American smaller companies stocks were the top performers back in 2016, with Financials and Technology stocks among the other best performing sectors. In fact, the reason why North American smaller companies funds are among the top performers is because they tend to have significant exposure to financial stocks themselves as well as domestic stocks likely to benefit the most from tax cuts. Meanwhile, at the opposite end of the scale were Asian and emerging market equities (as a result of the US dollar rally) while bond funds also performed badly in 2016 in anticipation of a rise in inflation and strong economic growth during Trump's first term in office.

What is interesting is that in 2016 the list of winners was relatively small, mainly focused on US stocks, while the list of sectors that lost money in the aftermath of the 2016 election result was much longer than this time around. The range between the worst performing sector and the best performing sector in 2016 was 18.55%. In contrast, in 2024 few sectors have lost money since Trump's election (see earlier table) and the range between the biggest winners and losers is half of what it was in 2016. Perhaps this is a reflection of the fact that the economic backdrop in 2024 is much different than 2016, with global central banks now starting to ease monetary policy.

Looking back at 2016, generally speaking the initial Trump trade continued right up until the Inauguration Day. So if that pattern were to repeat then it bodes well for US stocks heading into 2025.

After Inauguration Day

Back in 2016 a stronger US dollar was one of the most well known aspects of the Trump trade. However, while the US dollar rallied strongly at first it hit a peak by the end of 2016 (and before Trump took office) before imploding throughout 2017, as shown in the chart below.

The reason for what became known as the "Trump slump" was the new government’s failure to pass healthcare and tax-cut reforms which Trump had promised. Some might point to the fact that in 2024 the Republicans have secured the "trifecta" (having a majority in both the House of Representatives and the Senate while also gaining the presidency) which should boost Trump's ability to push through any reforms this time around. However, the Republicans secured the trifecta in 2016 too and, as things stand, heading into 2025 the Republicans will control the House and the Senate by the smallest margin of any president since Bill Clinton. It suggests that the potential for another Trump slump in 2025 is real and that will impact investment markets more widely.

If we now look at how different assets performed across Trump's first 4 years in office, the story is not quite what you'd have expected. The chart below shows the performance of unit trust sectors from 20th January 2017 to 20th January 2021.

In short:

• Chinese equities were the second best performing asset class despite Trump sparking a trade war by imposing trade tariffs on Chinese exports
• Equities outperformed bonds
• As you might have expected, financial stocks and technology stocks performed strongly
• UK equities lagged, partly a result of the UK wrestling with the fallout from the Brexit vote

What about individual sector performance in the S&P 500? As the chart below shows, while technology stocks surged, somewhat surprisingly, given Trump's love of fossil fuel and green energy scepticism, energy stocks slumped.

The reason why Chinese equities performed better than may have been expected and energy stocks didn't is that there is a world beyond Trump and the US. The pandemic in 2020 played a significant role in determining the winners and losers during his presidency. The Chinese stock market actually experienced a much shallower pandemic slump than western stock markets before surging once a Covid vaccine was discovered. Interestingly as Biden took office Chinese equities entered a bear market while US equities continued to power to new highs.

During Trump's first presidency energy stocks faltered as the rest of the world started to invest into and adopt green energy solutions, which hurt traditional fossil fuels and the companies that profit from extracting them.

In summary, between election day and Inauguration Day, investment markets are influenced by what Trump says. However, when he takes office they are more influenced by what he actually does.

A great example right now is bitcoin which has surged over 40% since Trump's 2024 election in the hope of lighter regulation and speculation that his media company is in advanced talks to buy a crypto trading platform. But what happens if Trump doesn't deliver lighter regulation for digital assets?

Black swan events (such as the pandemic or a financial crisis or even war) will have a significant bearing on how assets perform throughout Trump's second term. In addition, 2024 marks the beginning of a new rate cutting phase by major central banks. Movement through the interest rate cycle will have a major impact on investment markets in the coming months and years. Trump's second presidency also occurs at a time of heightened geopolitical tension (particularly in Ukraine and the Middle East) and elevated stock prices. So while history often rhymes it seldom repeats.

The lesson from Trump's 1st stint in office (although that is a small sample) is that you can profit from the Trump trade in the short-term. But global events and the macro-economic backdrop will also play their part, and increasingly so as time passes (as highlighted in my research article "What the 2024 US election means for your investments"