With the Trump administration continuing to issue new policies at a blistering pace, investors can be forgiven for struggling to keep up. With the backdrop constantly shifting, it is perhaps unsurprising that the so-called Trump Trade looks different today than it did in the weeks following November’s Presidential election.
Change of leadership
In the weeks after it was confirmed that Donald Trump was heading back to the White House, investors focused on the perceived benefits of a second Trump term. The promise of tax cuts and deregulation boosted market sentiment and investors were happy to play down the possible negatives of a renewed trade war and inflationary immigration and tariff policies.
Since the inauguration, there’s been a blitzkrieg of announcements, some being reversed within days or hours. That heightened sense of uncertainty has made the Trump market glass look more half empty than full in recent weeks and the original Trump trades - strong dollar, rising bond yields, US stock market outperformance, have stopped working.
Instead, investors have renewed their appetite for safe havens. Government bond yields have fallen, boosting the price of Treasury bonds. And the big winner has been gold, which has hit a new record high of almost US$3,000 a troy ounce. It has risen every week this year.
The sharp rally in the price of the precious metal builds on a powerful two-year rally which has seen gold rise from just US$1,600 an ounce in October 2022. There have been many drivers. Central bank buying of gold has been a big factor as has gold’s perceived resilience in the face of inflation and geo-political uncertainty. But it has come despite higher for longer interest rates, which should make gold less attractive versus other assets that offer investors a regular income.
Global stock markets holding their gains
Despite the greater uncertainty in the world today, stock markets have held onto their gains. The US S&P 500 remains above 6,000 at close to an all-time high. European shares have performed well despite sluggish growth in the region. And the FTSE 100 has soared to a new record level on the back of a weak pound.
The pro-growth story that followed Trump’s election win may have been largely priced into markets. Valuations remain at historically high levels, particularly in the US. But the market’s other key drivers - earnings, sentiment, and interest rates - remain supportive.
Fourth quarter earnings season is drawing to a close and it looks like 2024 as a whole will have delivered growth of around 11% in company profits, with more of the same pencilled in for this year too. That’s allowing earnings to pick up the baton from valuations, which have risen by nearly 50% since the cyclical low point in October 2022, and probably can’t go any higher from here.
Meanwhile, interest rates, while on hold for now in the US, are still heading lower over the longer term. The cyclical bull market, now 28 months old looks like it still has legs even if the expected gains in the decade ahead are notably lower than in the past ten years.
This week’s focus - growth and inflation
The spotlight this week falls on prices and the health of the economy. Japan kicked things off positively today with an unexpectedly large 2.8% growth rate for the last three months of 2024. It was the third quarter in a row of expansion and was positive both in absolute terms but also after accounting for now healthily positive inflation. Japan has coped with a return to modestly positive interest rates as its decades-long deflation appears to have come to an end.
In the UK, the picture is less exciting. Rising inflation - perhaps to a summer peak of 3.7% - alongside almost no growth at all in the second half of 2024, complicates policy making for the Bank of England. The European Central Bank, too, is having to weigh up lower growth with still rising prices. In both cases, the central banks are erring on the side of stimulus.
Not so, in America, where Friday’s Purchasing Managers’ Index (PMI) reading will likely show continued buoyancy for the US economy. With inflation above target and the labour market still strong, there is no incentive for the US Federal Reserve to cut rates in the short term - we expect it’s on hold for the time being.
