Since the presidential election in the United States earlier this month, the "Trump trade" has sparked a market frenzy, with most U.S. stocks rising across the board. The S&P 500 index has increased by nearly 2% since election day, and investors' stock exposure has reached its highest level in 11 years, reflecting positive expectations for policy easing and corporate tax cuts.
However, analysts warn that this enthusiasm for the "Trump trade" may be based on an outdated economic context. Compared to when Trump first took office in 2017, the current economic backdrop has significantly changed. Back then, the U.S. faced rising inflation and a Federal Reserve rate hike cycle, whereas now, inflation and interest rates are trending downward, the labor market shows signs of weakness, and global economic growth is slowing.
Moreover, the U.S. deficit is already high, limiting the room for fiscal spending to stimulate economic growth. While a Republican-controlled Congress might favor policy implementation, the market may overestimate these policies' impact on economic growth. Some views even question whether the economic growth in 2017 was fully attributable to tax cuts rather than broader macroeconomic factors.
Current investor bets are seen as overly concentrated on risk assets, small-cap stocks, and a rising dollar, while ignoring changes in the macroeconomic environment. Analysts suggest that this approach is akin to carving a boat to seek a sword, applying past success to today's different circumstances.
It is recommended that investors adopt a more defensive strategy, reducing exposure to stocks and increasing allocations to more stable assets like bonds to manage potential market volatility and policy uncertainty.
