A Rotation Into Value?

Sebastien Callebaut -

The Trump Trade Is Back

The Trump Trade is back in focus, as investors shift towards small-cap and "old economy" stocks in a manner reminiscent of the trends seen during Donald Trump's 2016 presidential campaign. Despite the market buzz, questions linger about whether this investment strategy, often dubbed the "Trump trade," has ever truly delivered the expected returns.

  • Recent market behavior underscores this renewed interest. Until late last week, the narrative of 2024 was dominated by the rise of big tech linked to artificial intelligence.
  • Suddenly, the Russell 2000 index of small-capitalization stocks surged from being roughly flat year-to-date to gaining 10% on Wednesday.

This marked its strongest weekly outperformance on record against the Russell 1000, which tracks larger firms. Concurrently, the technology-heavy Nasdaq experienced its largest one-day percentage decline since December 2022, even as cheaper "value" stocks rebounded.

Lower Taxes, Higher Trade Barriers

Although these trends reversed somewhat on Thursday and Friday, the past week and a half still recalls the market's reaction to Trump's surprise victory in the 2016 presidential election. Wall Street initially feared a protectionist agenda would lead to a stock-market selloff, yet the anticipation of tax cuts instead triggered a rally, giving birth to the Trump trade.

  • The core principles of the Trump trade remain unchanged: buy stocks, favor smaller, domestically oriented firms and "old economy" industries over tech giants, anticipate a higher budget deficit, expect lower immigration, sell bonds, buy the dollar, and sell the Mexican peso.
  • The latest market rotation was initially triggered by encouraging inflation data, which led markets to price in more rate cuts this year, causing Treasury yields to trend downward and the U.S. dollar to weaken.
  • This political landscape has influenced various market movements. For instance, the Mexican peso's volatility is at its highest since 2020. International markets have struggled even though they typically benefit when investors turn towards value stocks.

Eurozone equities had a brief surge on July 12 but have since underperformed. Domestically, sectors such as energy, manufacturing, and finance, especially regional banks, have excelled due to prospects of reduced regulatory scrutiny and higher interest rates.

Cause For Caution

However, replicating the Trump trade of 2016 in today's environment may not be straightforward. Trump is now perceived as more sympathetic towards cryptocurrencies, explaining Bitcoin's recent surge. Other dynamics, such as his public support from Tesla CEO Elon Musk and the selection of JD Vance, who has Silicon Valley ties, as his vice presidential nominee, add complexity.

  • A Republican presidency might cut aid for electric-vehicle makers like Tesla while shielding them from Chinese competition, creating uncertainty.
  • Retail trading in Tesla shares has increased, with almost as many investors selling as buying. Similarly, Big Tech could benefit if a Trump administration lacks the antitrust zeal of the Biden administration.
  • However, oil-and-gas majors might see their gains from lower environmental barriers offset by a production glut.
  • Moreover, the circumstances have changed significantly since 2016. The budget deficit is much higher, and the top corporate tax rate has already been lowered significantly. Trump's proposed tariff increases could also have a more substantial impact now, as many of the protectionist measures from his previous administration remain in place.
  • It is also debatable whether the Trump trade worked for investors during his first term. While the tax cuts did boost the stock market in 2018, the benefits primarily accrued to the largest companies, particularly in the tech sector

The Russell 2000's outperformance after the 2016 election was short-lived. Despite a brief revival in 2018, small-caps underperformed during Trump's tenure. Industrials, energy, and banks all fared worse than the S&P 500, while the dollar and Treasury yields ended up lower. Ultimately, the best Trump trade was in tech stocks.

Disclaimer

Please note that Benchmark does not produce investment advice in any form. Our articles are not research reports and are not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Vince Fleming / Unsplash.