Is the Trump trade back? – Damien’s Market Update – July 2024

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June brought the curtain down on the first half of 2024 and with the exception of high yield bonds, most bond sectors finished the first half of 2024 in positive territory but only just, despite some analysts predicting 2024 would be the year that bonds bounced back. By contrast, stock markets were on a tear during the first half of the year.

If you go back to the start of the year, the median investment bank prediction of where the S&P 500 would finish the year was 4820. By the start of July the S&P 500 was already over 5400, which equated to a return of over 16% in just six months. But it didn’t stop there, as the S&P 500 pushed on to 5667 in the first half of July. Along the way the S&P 500, along with a number of other US and global stock markets, set numerous new all-time highs.

The rally in US stocks resulted in investment banks upping their end of year targets for the S&P 500. For example JP Morgan (which was one of the most cautious investment banks at the start of 2024 with a prediction of 4300) now has an end of year target of 5317, versus predictions of 5600 from the more bullish investment banks. 

It means that the more cautious investment banks have become less cautious as the year has progressed while the most bullish banks have become more cautious, with their predictions converging towards 5500, which is where we are now as I make this video. Interestingly the average full year gain in a US election year (like 2024) is an impressive 11%. So far in 2024 we've already surpassed that and then some. So is this as good as it gets for 2024?

While July started off on a positive note, with global stock markets pushing higher, Investors' nerves finally began being tested in the last couple of weeks.

Last week was the worst week for the S&P 500 and the tech-heavy Nasdaq 100 since April. Interestingly, at the same time as the Nasdaq 100 slumped the Russell 2000, a US small cap index, surged. The narrative that many commentators settled upon to explain the move was that investors were now betting that rate cuts would stimulate the US economy and therefore provide a boost to underperforming stocks. So they bought the market laggards and ditched high-flying tech stocks. It still seems slightly strange reasoning but market rotations aren’t necessarily a bad thing for bull markets. It's when investors flock from stocks into safer assets, such as cash, bull markets like the one we are enjoying now are under threat. 

The last week also saw a new distraction occupy investors. In recent months politics has had a significant impact on the performance of various stock markets at various times but, until now, the US stock market had largely been spared such politically induced volatility.

However, the failed assassination attempt on former US President Donlad Trump dramatically changed that. After the shooting Trump’s odds of winning the US election rocketed (to a 75% chance) while those of the then President, Joe Biden, slumped. Already reeling from Biden’s disastrous performances in recent public appearances, which included calling Ukraine’s President Zelenskyy “President Putin”, the Democrats had all but conceded November’s election unless Biden stepped down. 

It meant that investment markets suddenly began pricing in a Trump victory in this year’s US election. The Trump trade was back!

Long time investors may recall the Trump trade during the Republican’s previous term as US President. Broadly speaking it involved a stronger US dollar, the dumping of bonds while equity investors rotated out of more defensive sectors and into cyclical stocks (those most sensitive to the health of the economy).

The market narrative at the time was that Trump would unleash huge amounts of fiscal stimulus (government spending) in a bid to “Make America Great Again”. The logic was that this would lead to economic growth, higher inflation and higher interest rates, hence why bonds were dumped and equity investors favoured economically sensitive sectors in the US, such as bank stocks and small caps.

Last week we saw aggressive market moves as a result of Trump’s shortening victory odds. We saw the acceleration of the market rotation into US small caps with the Russell 2000 enjoying an 8% rally in just 10 days. Meanwhile the Nasdaq 100 slumped by 4% over the same period. 

This follows a similar pattern to what we saw back in 2016, with US smaller companies outperforming. But that is where the similarities largely ended, for now at least. Bond yields held fairly steady, while the US dollar has weakened slightly. Perhaps the Fed’s war on inflation is trumping (no pun intended) the belief that Trump will stoke inflation? Or perhaps it’s that Trump has been more focused on attacking his political opponent rather than talking about his economic plans?

Trump’s impact has already been felt overseas. The trade war with China was a core policy of Trump’s first presidency. The increased likelihood of a Trump election win has now brought the possibility of an escalation in trade war tensions back into focus. The market was already rattled by the current US government warning that it is considering using severe trade curbs on companies providing semiconductor technology to China. But Trump's comment last week that Taiwan, which is pivotal in the global microchip industry, should pay for the protection the US provides against Chinese invasion shook the semiconductor market. Nvidia’s share price slumped 7.5% last week which sent the S&P 500 and the Nasdaq 100 to their worst two day slump since April. So much for Trump being good for the stock market.

With negative sound bites also emanating from the Trump camp over funding for Ukraine in its war with Russia, European stocks, as measured by the Euro Stoxx 50, slumped more than 4% last week despite the European Central Bank keeping interest rates on hold and suggesting a rate cut was possible in September. 

It means that even if the Trump trade is difficult to pin down in the US right now, it's already showing up as bad news for Chinese stocks, European stocks and big chipmakers. With each soundbite Trump produces in the coming months the winners and losers in any potential Trump trade will likely change, but they should eventually become clearer.

But then news that Joe Biden was stepping aside and that Kamala Harris would  likely take on Trump in the US election saw the waters muddied further. Investors began to question their eagerness to jump into the Trump trade last week. Following Biden’s news, European stock rallied broadly 1% as did US stocks, while Nvidia’s share price jumped over 4% in 24 hours. 

Of course US politics aren’t the only contributing factor but one thing is for certain, this last 10 days has given us a taste of the volatility that the US election is going to cause in investment markets going forward and there’s more than 3 months of campaigning to go. 

But despite the slight wobble in the last couple of weeks, as investors we've still rarely had it this good. It’s not just stock markets enjoying new all-time highs, the price of gold got in on the act too as hopes of Fed rate cuts hurt the US dollar. Unsurprisingly my £50k portfolio has hit its own series of new all-time highs. But the recent stock market wobble serves as a timely reminder that such market conditions can’t go on forever. Certainly enjoy them but stay humble. Despite the positive vibe there was one fly in the ointment for UK investors. The pound exploded higher against the US dollar this week as hopes of Fed rate cuts along with positive UK economic growth news and political stability saw investors favour sterling. As I record this the pound is trying to break above the huge resistance line at $1.30, meaning that the pound is at its strongest level in over a year. 

For UK investors a strong pound hurts their US holdings. But it’s not just a US dollar phenomenon. After French voters rejected the far-right which has now left the country struggling to form a government. Unsurprisingly the pound strengthened against the euro too, negatively impacting any European assets for UK investors. But as investors, we will never get it all our own way.