The "Trump Deal" may have been completely priced in! Now the question arises
Investors are actively raising assets related to Trump, anticipating that his election will continue tax reduction policies and deregulation, driving stock indices higher. The S&P 500 index has risen about 3% in the past month. However, the market is concerned about the risk of inflation intensifying as profits are taken early. Although Trump plans to impose tariffs on imported goods, a global trade war could trigger price pressures. Compared to 2016, the current levels of inflation and interest rates are different, and the market needs to digest the contradiction between economic growth and inflation risks
In recent weeks, investors have been actively competing to drive up assets related to the "Trump trade," hoping that President-elect Trump will take action once in office.
There is a general expectation that potential tariffs will not lead to adverse consequences, Trump's tax cuts from 2017 will be extended, and deregulation will stimulate Wall Street trading and lead to lower energy prices.
Of course, this raises a question: What if they are wrong?
More specifically, the anticipated tax cuts, deregulation, and spending on energy and other projects have driven major stock indices steadily upward, while the prices of gold, silver, and cryptocurrencies have also rebounded. For example, the S&P 500 index has risen about 3% over the past month, as bets on Trump's victory began to accelerate.
In some ways, there are concerns that the market is front-running gains and may pay the price in the future, especially if Trump's measures not only boost economic growth but also exacerbate inflation, as some economists worry.
Holly Newman Kroft, Managing Director at Neuberger Berman Private Wealth, stated in an interview on Tuesday, "The market has been on a tear before the election, and now it is soaring post-election, driven by optimism, tax cuts, and a pro-business stance from the new government. The market will have to digest the impact of this tug-of-war between the current administration's growth-promoting positioning and the rising risks of inflation."
Inflation was not an issue when Trump first took office in 2017, but it has become a concern now, even though it has fallen back to the Federal Reserve's 2% target. The core CPI for October, released on Wednesday, showed a year-on-year increase of 3.3%, well above the Fed's target.
While Trump has publicly stated a desire to impose a 10% blanket tariff on imports, this alone may not reignite price pressures, but a full-blown global trade war could trigger price pressures. This is different from the policy environment at that time.
Trump's Presidency—Then and Now
When Trump took office in 2016, not only was inflation moderate, but the Federal Reserve's key policy interest rate was anchored near zero. Now, it is in the target range of 4.5%-4.75%, a restrictive level as Fed policymakers try to balance relatively subdued inflation with concerns about a weak labor market.
Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, stated that U.S. stocks could continue to rise before the end of the year, "but we will not actively chase trends before 2025."
Shalett noted in a statement, "First of all, this is not a replay of 2016. When Trump entered the presidency that year, the U.S. economy was recovering from a prolonged stagnation of six years, with the federal funds rate at zero. While the market may underestimate policy certainty based on a single viewpoint, our experience suggests that the current Trump policy agenda carries risks and contradictions, and even with strong support in Congress, prioritization and execution need to be considered." In other words, Trump's entire agenda may not be achievable, and even if it is, the timing of its implementation is uncertain.
According to strategists like Kroft and Shalett, this is significant for investors, but it may not be as frightening.
Although Shalett expressed caution, she stated that Morgan Stanley "does not lean towards fundamentally re-evaluating our asset allocation recommendations," but simply advises clients not to take on excessive risk and to focus on "broad balance and diversification."
Kroft also recommends diversifying investments and focusing on high-quality companies rather than chasing momentum. For example, she noted that Neuberger Asset Management has an underweight position in high-yield bonds and emerging market debt, while being overweight in small-cap stocks, which have performed well since Trump's election.
The Federal Reserve Will Be Impacted
However, there is another significant issue in the investment environment: if Trump's agenda drives economic growth and inflation up, this could change the Federal Reserve's decision-making.
In fact, the futures market has recently adjusted its expectations for the pace of interest rate cuts by the Federal Reserve next year, now anticipating that the federal funds rate will stabilize in the range of 3.75%-4%, about 0.5 percentage points higher than a few weeks ago.
Trump is in favor of interest rate cuts and criticized the Federal Reserve for raising rates during his last term amid economic weakness. Although this uncertainty may be concerning, there are also reasons to believe it could be a good thing.
Market veteran Jim Paulsen, former chief strategist at Wells Fargo, cited research on economic uncertainty, stating that the market is actually negatively correlated, meaning greater uncertainty leads to rising stock prices. However, this does not mean there won't be short-term volatility; the "Trump trade" has slowed down in the past two days. Paulsen said:
"I don't think we're going to crash; I don't think the market is as ahead of itself as people think. This is just the normal ebb and flow of the market. We're ready for a pullback at some point."