Guotai Junan: Super Week Ends, US Stocks Heat Up on "Reinflation"

According to the Zhitong Finance APP, Guotai Junan released a research report stating that the three major macro factors in the U.S. stock market—U.S. elections, inflation/Federal Reserve policy, and economic fundamental risks—have gradually cleared up. With the final results of the U.S. elections announced, Trump swept all swing states with overwhelming momentum and returned to the White House. At the same time, apart from the Senate, the House of Representatives is also likely to be dominated by the Republican Party. In the U.S. political system, a "unified" government with both houses of Congress is of significant importance for Trump's policy implementation, especially in areas where the Republican and Democratic parties have conflicting interests. Considering this is also Trump's last term, his policies may lean towards being more radical to create greater historical achievements.

Guotai Junan's main points are as follows:

How will Trump 2.0 policies be implemented?

The uncertainty of political maneuvering in the U.S. has abruptly ended with Trump's victory, and the "Trump trade" has cooled down. The new policy direction will be one of the main logical frameworks for market positioning in the short term. Historically, except for the 2008 financial crisis, even if U.S. stocks show volatility before the election, they typically stabilize and trend upward within one to two months after election day, with economic fundamentals largely dominating the U.S. stock market's performance. If there is a market correction shortly after election day, it is likely to be an opportunity for re-positioning at lower prices.

Regarding future policy directions, Trump and the Republican Party have clearly outlined their plans in three documents: "Agenda 47," "2024 GOP Platform Make America Great Again," and "Project 2025." Overall, Trump's policy proposals have not changed significantly compared to his first term. In the economic sector, tax cuts, increased tariffs, manufacturing return, and deregulation remain the core of his policies, and related industries will be the key beneficiaries in the Trump trade 2.0 era. Historically, except for the 2008 financial crisis, even if U.S. stocks show volatility before the election, they typically exhibit a stable upward trend within one to two months after election day, with economic fundamentals largely dominating the U.S. stock market's performance. If there is a market correction shortly after election day, it is likely to be an opportunity for re-positioning at lower prices.

From the current market trends, the "Trump trade" has cooled down after Trump's victory—asset performance has begun to diverge. For example, while the S&P 500 index continues to reach new highs, the financial sector, which benefits from deregulation, has not performed well. Additionally, interest rate cuts have once again led to a synchronized decline in yields across various maturities of U.S. Treasury bonds. Looking ahead, the order of implementation of policies in the Trump 2.0 era and their subsequent impacts are of greater significance for medium to long-term market positioning. The firm believes that the order of policy implementation will be: tariffs—immigration/regulatory easing—tax cuts and other fiscal policies.

Federal Reserve: Concerns about "re-inflation" are premature.

In the recently concluded November monetary policy meeting, the Federal Reserve lowered interest rates by 25 basis points as expected. Overall, Powell made a slightly dovish statement—recent strong economic data has not changed the Fed's basic path of continuing to lower policy rates to neutral levels Regarding the labor market, Powell stated that it is "cooling very slowly," and as inflation decreases and the labor market cools, the upward risks of inflation have weakened, while the downward risks to employment have increased. However, at present, the risks of achieving employment and inflation targets are roughly balanced.

Regarding the market's concern about the impact of Trump's potential return to power on the U.S. economy, Powell stated: Trump's new policies will not affect the Federal Reserve's policies, but the Fed must model step by step and incorporate them into the framework of its dual mandate. This statement may seem contradictory, but when considering the time factor, it makes sense. Not to mention that there are still two months until Trump officially takes office, even after taking office, the timing and substantive content of most of his policies will still be subject to discussion. The hypothetical speculation about whether this will lead to a second wave of inflation and whether it will affect the Fed's pursuit of its dual goals leads the bank to believe that this will not have a significant impact on the current Fed, which "has no policy path and will continue to make decisions meeting by meeting." In other words, in the short term, the U.S. will still be in a rate-cutting cycle, which also corroborates Powell's dovish statements.

Investment Suggestions:

First, attention can be paid to U.S. small and medium-sized companies (Russell 2000 component companies) under the triple benefits of "rate cuts + tax reductions + manufacturing return." Secondly, the sequence of policy implementation in the Trump 2.0 era can be tracked to strategically layout related industries:

1. U.S. domestic manufacturing listed companies benefiting from comprehensive tariff increases;

2. Energy companies such as oil that benefit from support for the development of traditional energy, lowering extraction standards, and increasing subsidies;

3. The financial industry benefiting from relaxed financial regulations