The "Trump Trade" remains hot, but how long can it last?

According to Zhitong Finance APP, after Trump won the U.S. presidential election last week, assets such as the dollar, U.S. stocks, and Bitcoin, which are seen as part of the "Trump trade," rose sharply. Currently, the "Trump trade" still looms over the market, and Trump's economic agenda, including tariffs, tax cuts, and deregulation, will drive significant fluctuations in the global investment landscape. As Trump attempts to break all norms from free trade to Federal Reserve independence, this era may become more turbulent.

However, investors are concerned about how far the "Trump trade" can go. Assets such as stocks and corporate bonds appear expensive relative to historical levels, and Trump's trade protectionist policies may lead to a resurgence of inflation and force the Federal Reserve to maintain high interest rates for a longer period. Additionally, the U.S. economy is facing an expanding fiscal deficit and a labor market that is already showing signs of fatigue, which could put pressure on economic growth prospects.

The concept of the "Trump trade" became popular after Trump first won the presidential election in 2016, followed by a surge in U.S. stocks and the dollar—similar to the situation after this month's election. Similar to eight years ago, bank stocks were one of the fastest rising sectors, buoyed by expectations of regulatory easing, while small-cap stocks surged due to optimistic sentiment regarding tax cuts and investment-related policy commitments. More broadly, these moves indicate that investors have confidence in the Trump administration's policies to stimulate economic growth and corporate profits.

However, the response of the fixed income market this time is different from eight years ago. After a significant rise in the yield of 10-year U.S. Treasuries on the first trading day after the election, it fell over the next two trading days and then rose again. This volatility reflects market participants' doubts about the next steps of the "Trump trade." To make matters worse, the Federal Reserve is currently in a loosening cycle.

Given Trump's vow to implement a game-changing regulatory agenda favorable to digital assets and establish a Bitcoin strategic reserve for the U.S., cryptocurrencies are a key component of this "Trump trade." All of this has prompted short-term traders and institutional professionals to invest billions of dollars in digital currencies, pushing Bitcoin and other digital currencies to record highs.

It is difficult to say how long the "Trump trade" can last. A few months after the 2016 election, the momentum of the "Trump trade" began to fade. During the 2020 election, a series of events in the "Trump trade"—the strengthening of the dollar, rising U.S. Treasury yields, and strong performance of bank stocks and small-cap stocks—were largely affected by the pandemic, either giving back gains or reversing Today's U.S. economy and market are at a more mature stage than eight years ago. The price-to-earnings ratio of the S&P 500 index is 26 times, which is 35% higher than in 2016. This leaves little room for a new round of valuation-driven rebounds and raises the threshold for policies like Trump's tax cuts to boost corporate profits. More importantly, the lack of corresponding spending cuts in tax measures could lead to a rebound in inflation, which may force the Federal Reserve to reconsider its plans to continue cutting interest rates. The recent tug-of-war in U.S. Treasury yields reflects these concerns