Investors Warn Against Replicating 'Trump Trade'

Investing.com — Investors attempting to replicate the "Trump trade" strategy from 2016 in today’s market "are making a mistake," according to BCA Research strategists.

In a note released Thursday, BCA’s team highlights that those expecting similar economic conditions and policy outcomes under Donald Trump’s new term are overlooking several key differences in the current macroeconomic landscape.

Key Differences in Economic Conditions

The primary challenge lies in the contrasting inflation and interest rate environment. In 2016, both rates and inflation were historically low, allowing fiscal stimulus to spur economic expansion without significant inflationary pressures.

Today, however, inflation is substantially higher, and bond yields have risen to levels that complicate the effects of additional fiscal stimulus. BCA emphasizes that even if substantial stimulus measures were implemented, "it will not be welcomed by markets as it was in 2016."

This time, rising bond yields are likely to lead to a negative response from the equity market, which has recently exhibited sensitivity to inflation expectations and interest rate hikes.

Impact on Stock Market and Policy

A negative stock market reaction to higher bond yields and inflation expectations will restrict both the extent to which Treasury yields can rise and the aggressiveness of policymakers in pursuing fiscal stimulus, noted strategists led by Ryan Swift.

BCA also highlights Trump’s proposed policies on tariffs and immigration as additional risks to economic growth. While new tariffs may increase prices for goods, they would also place pressure on the already struggling US manufacturing sector unless balanced by significant demand-side stimulus.

Moreover, immigration restrictions could worsen the slowdown in labor supply growth, dampening employment and limiting household spending.

"The prime-age participation rate should level off now that it is above pre-pandemic levels, and tighter immigration policies will lead to decreased population growth," strategists stated.

These factors are projected to cause slower employment growth, which will negatively impact overall household income and spending.

Bond Market Outlook

In bond markets, BCA anticipates short-term increases in Treasury yields but predicts longer-term declines as economic factors limit yield increases.

Federal Reserve Chairman on Thursday mentioned that the central bank remains on an easing path, although the pace and ultimate endpoint of that easing will depend on data.

BCA strategists continue to forecast more easing than the market anticipates over the next 6 to 12 months but added that another 25 basis point cut in December is not assured.