There may be no durable Trump trade

Mike Dolan

Pity the poor forecasters compiling 2025 investment outlooks. Little of their hastily-compiled post-election annual outlooks may endure beyond the end of this year.

Investors seized upon the unexpected size and sweep of this month’s U.S. election win by Donald Trump and his Republican Party to double down on a variety of so-called Trump trades.

If true to his word, it was assumed, Mr. Trump’s promises of corporate tax cuts, tariff hikes and immigration curbs would expand an already vast budget deficit, whack Treasury bonds and flatter firms’ bottom lines and stock prices.

At the same time, investors also bet that the unintended consequences of tariff hikes and immigration crackdowns could rekindle inflation, hamstring the Federal Reserve’s monetary policy easing campaign and push both the interest rate horizon and the dollar higher.

It all sounds quite neat–and it’s played out to some extent in an economy that’s already running hot, thanks largely to the outgoing Biden administration.

Since the first week in October, when Mr. Trump reclaimed his position as bookmakers’ favorite in the race for the White House, the dollar index has jumped 5%, 30-year bond yields have added half a percentage point, the S&P 500 index has climbed 3% and Mr. Trump’s presumed cryptocurrency sympathies have prompted Bitcoin to balloon by more than 50%.

The problem is that for these trades to endure through 2025, investors still need to make a trifecta of good guesses.

With two months still to go before Mr. Trump takes office, markets first have to figure out which of his pledges will actually materialize and to what degree. And of the ones that do show up, there is the trickier problem of guessing their macroeconomic impact.

And then investors need to go one step further and determine whether financial trades made on the back of it all are sequenced and skewed the right way.

After all, the past few decades are littered with seismic moments that produced market reactions almost no one would have predicted. Even if someone somehow bet on a global pandemic occurring in 2020, for example, it’s unlikely that they would have simultaneously forecast a 15% surge in world stocks in the same year.

Unravelling threads

So what will become of the big macro Trump trades?

Even ardent Trump supporters radically differ on both the likely and even desired outcomes of his main economic proposals.

One of the main punts is rising Treasury yields. This is largely based on non-partisan estimates of the budget cost of Mr. Trump’s various tax-cut promises, including rolling over his 2017 cuts and slashing corporate tax rates.

With a Republican clean sweep of Congress, it now seems plausible that these plans will come to fruition, and Treasuries have clearly felt the heat as a result.

But, as Eurizon hedge fund manager Stephen Jen points out, there’s been virtually no market focus on the plans for draconian spending cuts–which, even if partly successful, could cut across the standing projections nagging bond markets.

Mr. Jen calculated it was “possible, even if not probable,” that the annual budget gap could actually be dragged back to less than 1% of GDP by 2028 even on a partial implementation of much-touted spending cuts and a government “efficiency” drive. “The net impact on inflation and bond yields could very well be negative,” he posited.

If that seems fanciful right now, it should at least question straight-line cause-and-effect in the other direction.

Moreover, what if the proposed mass layoffs of 25%-50% of some 2.3 million federal workers tips an already cooling labor market into a deeper funk? Or what if it generates job insecurity that severely damages household confidence?

Far from leaning back against fiscal stimulus, that scenario could see the Fed’s reaction function shift in the other direction

And pulling these threads undermines a host of other trades–most obviously an assumption the dollar will continue moving higher from here.

If the economy falters, perhaps because of a global trade war that backfires on the U.S. via Chinese or European retaliation and dampened overseas demand, other tenets of the “Trump trade” start to unravel too.

And if you think tax cuts will win out either way, you have to assume a Republican sweep in Congress is strong enough to get those cuts over the line. The Republican majority in the U.S. House of Representatives is below 10, far less than during Mr. Trump’s first term and, back then, 12 Republicans actually voted against his Tax Cuts and Jobs Act of 2017.

Annual guessing game

Pity the poor forecaster indeed.

As Wall Street investment banks start to roll out 2025 outlooks this week, what appears like a consensus for another 10% rise in U.S. stock indexes seems to rely on markets muddling through the fog on some middle ground that’s less than half the annual gains of the past two years.

And they have all been wise to attach get-out clauses.

JPMorgan’s global economists include an “alternative scenario” that supposes the billed political disruption just ends up being a giant shock to the world economy.

“If the U.S. turns aggressively inward by sharply curtailing trade and attempting large-scale deportations, the fallout would be a far more adverse global supply shock,” wrote Bruce Kasman and the rest of the JPMorgan team. “The disruptive impact of this shock would be amplified by retaliation and a global sentiment slide. The risk of a large and broad-based negative shock to business sentiment is the major threat to the global expansion next year.”

That’s not what the Trump trade says on the tin.

(The opinions expressed here are those of the author, a columnist for Reuters)