Recently, the "Trump trade" style has shifted, with both US stocks and Bitcoin falling, while gold prices have risen significantly. Meanwhile, the dollar and US Treasury yields continue to climb, indicating market concerns about rising interest rates and economic uncertainty.
US Stocks and Bitcoin Retreat, Market Volatility Increases
As of the close on January 10th, the Dow Jones Industrial Average has fallen 1.42% year-to-date, the S&P 500 Index has declined 0.93%, and the Nasdaq Index has dropped 0.77%. The major US stock indexes have erased gains from the beginning of the year, and Bitcoin prices have also fallen, with market sentiment turning cautious.
Following the November 2024 election when Trump won by a large margin and gained control of both houses, the market had expected the Trump administration to push for stronger policies. In November, the "Trump trade" was strong, with US stocks soaring and the dollar and Treasury yields rising. However, since last December, the market style has shifted, favoring growth and large-cap stocks, while cyclical sectors such as finance, industry, and energy have started to pull back.
Specifically, in November 2024, the Dow surged 7.5%, and the Russell 2000 Index jumped 10.8%. However, in December, the Dow retreated 5.3%, and the Russell 2000 Index fell 8.4%. Among the 11 sectors of the S&P 500 Index, except for consumer discretionary, all other cyclical sectors suffered significant declines.
US Treasury Yields Surge, Increasing Market Pressure
The yield on the US 10-year Treasury note has climbed to 4.8%, and the 30-year Treasury yield has surpassed 5%, the highest since November 2023. Since the Federal Reserve began lowering interest rates in September 2024, the 10-year Treasury yield has risen by more than 100 basis points, an increase that is historically unusual.
The market expects the Federal Reserve may cut rates only once in 2025, or possibly pause rate cuts or even raise rates. Bank of America analysts believe that if the core PCE index's annual growth exceeds 3%, the Federal Reserve might revisit the topic of rate hikes. Previously, Bank of America had forecast two rate cuts in 2025, but their stance has shifted to a more hawkish outlook following strong non-farm payroll data.
Reasons for the Shift in Trump Trade
Although Trump's policies have not changed significantly, doubts have arisen regarding the sustainability of his economic policies. On one hand, the Federal Reserve's hawkish stance has pushed up medium- and long-term Treasury yields. On the other hand, the unsustainable nature of fiscal deficits has also added market pressure. Zhong Zhengsheng pointed out that US stock investors are increasingly focusing on whether companies can maintain profitability in a high-interest rate environment, with cyclical stocks and small- and mid-cap stocks bearing the brunt of the impact.
Tech Stocks Show Resilience
Compared to other sectors, US tech stocks have shown strong resilience in the current environment, mainly due to the development of artificial intelligence (AI) and their safe-haven qualities. Leading tech stocks have a positive correlation with the 10-year Treasury yield, helping to partially shield them from the impact of rising interest rates.
Outlook for the Future
As Trump prepares to take office, with changing market expectations for Federal Reserve policies and uncertainties in economic growth and corporate profitability, markets may continue to face volatility. Investors should closely monitor Federal Reserve monetary policy, non-farm payroll data, and corporate earnings performance, while remaining wary of potential risks in cyclical stocks. Tech stocks, as a safe-haven sector, may continue to lead the market, but the overall trend will still depend on changes in medium- and long-term interest rates and the macroeconomic environment.
