Beyond The Trump Trade

Trading and investing around political events is always fraught with risk. US election implications are worth considering but not obsessing over, whereas a continued focus on economic and corporate fundamentals is vital.

05 December 2024

One of the main draws of investing is the intellectual challenge that comes from having so many levers to pull across asset classes, funds, securities, currencies as well as whether to go long, short, overweight, underweight and so the list goes on. And the inputs of course are even more numerous. We are literally drowning in data. According to IBM, annual global data creation is projected to surpass 180 zettabytes (equating to 180 trillion gigabytes) by 2025¹. The temptation to try to capitalise on this data flood by adjusting those many levers at our disposal has a strong ‘because it’s there’ appeal akin to mountaineering or some mathematical challenge. And the data flood, along with the temptation to act on it, are never greater than during high stakes events like elections. But it is worth bearing in mind that the investing world is littered with failures large and small, testament to the statistical folly of short-term trading. There are exceptions of course. A French trader known only as ‘Theo’ reportedly made USD 49 million² by taking positions on the recent US election based on surveys which asked US voters how they thought their neighbours would vote. Theo took that fresh data set, adjusted the levers, and won big. Statistically though, it makes little to no sense to set out to be a Theo. The reality for many is more like French cyclist Raymond Poulidor who became known as ‘the eternal second’ for never quite winning the Tour de France. With this in mind, how "should" investors respond to the aftermath of said recent US election?

The Trump Pump

The US election has produced no shortage of assumptions about US economic policy and market consequences, even as cabinet positions get filled. The consensus runs something like this: tax cuts and deregulation will see economic growth surge, tariffs will create a degree of one-off inflation but generally hurt the rest of the world more than the US, while the mass deportation of millions of illegal immigrants (also known as ‘undocumented migrants’) will encourage more American-born workers to re-enter the labour market. The Biden administration’s green policies will be reversed, which will further help consumers and businesses while government will shrink as waste is reduced through a new efficiency drive led by the new Department of Government Efficiency (DOGE) led by none other than Elon Musk along with Vivek Ramaswamy.

Stock markets will in theory love all of this too of course. But just as there are theoretical upsides, so too are there theoretical risks, chief among these being inflation. The US economy is only just getting over an inflationary surge that was arguably the result of throwing too much money at it in the form of stimulus including the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act and Inflation Reduction Act (IRA) when supply chains and labour markets were only just recovering from the pandemic. Renewing tax cuts for consumers and businesses in 2025 could prove to be another untimely injection into the economy, with a negative impact on the already stretched budget deficit and therefore potentially higher long term interest rates if America’s creditors balk at the unfunded costs of such a move. Similarly, deporting millions of undocumented workers may also have adverse inflationary consequences. According to the Pew Research Center, over 8 million illegal immigrants are either working or looking for work in the United States, with around 5% of the workforce represented by this group since 2003 on average³. In an economy where services and hospitality-related inflation has been slow to come down, deporting the very workers who make up much of the sector represents a genuine inflationary threat. Tariffs have not been mentioned yet but it does not take much imagination to imagine what will happen to consumer prices if a 60% tariff is indeed imposed on all Chinese imports.

Unintended consequences: deportations could push already-sticky services inflation higher:

US Consumer Price Index (CPI) inflation

From 30 Jun 1984 to 31 Oct 2024

 

Pre-election claims versus post-election realities

Picking through all the policy promises and deciding what will actually come to pass, and then attempting to make educated assumptions about what the actual effects will be, is clearly a daunting task for any investor. For one thing, politics generally, and President Trump’s brand of it in particular, tends to exhibit a degree of divergence between what is claimed during election campaigns versus what is actually done in office. In President Trump’s case, this is highlighted by previous promises such as the Mexican wall which never properly came to pass. Can investors really take every campaign pledge at face value is a pertinent question, but then it is swiftly followed by whether the potential good for the economy and markets (growth, supply side reform) would be outweighed by the potential bad (deficits, inflation, uncertainty). The success of winning French trader Theo, plus the breathless pace of the so-called ‘Trump trade’ in which stocks, the US dollar and cryptocurrency have all soared, creates an inevitable temptation in the minds of investors who feel that they simply must get involved. Standing by amid such moves correspondingly feels like a kind of intellectual failure. But adhering to a previously defined strategic asset allocation framework remains sovereign amid the uncertainty, even if the market moves right now feel so pronounced and game-changing in the very short term.

‘Trump trades’ just look so decisive, but might prove fleeting if policy diverges from promises:

Financials/Real Estate and Bitcoin

From 29 Dec 2023 to 29 Nov 2024

 

The fundamentals are all right

This then leaves the old fashioned, grinding work of assessing the fundamentals. And from this perspective, it does not require a US election to reveal an economy that happens to be in good shape right now. In fact, the US economy has quietly been doing well anyway despite the apparent need to make it great again. It is growing at a near-3%* annualised pace. The Michigan Consumer Sentiment survey has been broadly rising since mid-2022, unemployment remains low at 4.1%*, the economy added 223,000 jobs in September* before the distortive effects of the recent Florida hurricanes and Boeing strike (now resolved) while wages are growing at 4% on the previous year*, firmly ahead of inflation at 2.6%*. As for the stock market, its underlying corporate earnings are closely correlated to that solid economy but have of course also been driven by the on-going Artificial Intelligence (AI) theme which the International Monetary Fund described earlier this year as “a technological revolution that could jumpstart productivity, boost global growth and raise incomes around the world”. The US is well placed to continue delivering and profiting from this trend given its uniquely innovative and well-resourced technology sector. In this sense, the immediate market response to the election has heightened the sense of exceptionalism US equity markets enjoy and pushed valuations ever higher. This deserves its own analysis but from a long-term fundamental perspective, America’s prospects remain encouraging regardless of its politics.

Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments.