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The Trump Trade Is On
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To understand the perceived “Trump Trade,” we must first remember that Trump’s odds of winning the election has now reached at least 69%. Next, we must understand how the proposed policies and likely Trump victory would impact assets, industries, and markets. The best description I have seen came from Alex Kruger, a well-known economist and trader from Argentina: #1 Bullish for Crypto Reason: Trump’s administration might pursue supportive regulations for cryptocurrencies, fostering innovation and adoption. #2 Steepening Yield Curve Reason: Fiscal policies under Trump, including increased government spending and tax cuts, could lead to higher inflation expectations and rising long-term interest rates, resulting in a steeper yield curve. #3 Bullish for Oil & Gas, Steel, and Coal Reason: Deregulation and policies promoting domestic production of fossil fuels and industrial metals (tariffs). #4 Bullish for Financials Reason: Deregulation in the financial sector could reduce compliance costs and increase profitability for financial institutions. A steepening yield curve is also beneficial for financial institutions, which profit from the wider spread between short-term borrowing rates and long-term lending rates. #5 Bullish for Small Caps Reason: lower taxes, deregulation, and support for domestic manufacturing are generally more favorable for small-caps. #6 Onshoring Reason: Policies encouraging companies to bring production back to the U.S. Positive for domestic manufacturing and companies involved in reshoring efforts. #7 Bearish for Renewable Energy Reason: Reduced emphasis on environmental regulations and support for fossil fuels over renewable energy. Potential decrease in subsidies for renewable energy projects. #8 Bearish for Healthcare Reason: Potential efforts to repeal or replace Obamacare, creating uncertainty in healthcare. The idea of a Trump Trade is not theory though — you can see it starting to show up in the data. Take the Russell 2000 as an example. Hannah Miao of the Wall Street Journal points out the small cap index has lagged the S&P 500 significantly for the last 6 months, but that has drastically changed in the last few days. The Russell 2000 has almost fully caught back up to the large cap index now. This is not the first time that we have seen something like this occur — investors showed a relative strength in small caps vs tech back in 2016 when Trump was elected and they are showing the same relative re-rating over the last few days as well. This can also be illustrated by those going long Russell and short Nasdaq 100, according to Holger Zschaepitz. Additionally, you can see that industrial stocks have doubled the performance of the S&P 500 in the last three trading sessions. John Melloy at CNBC highlights a rapid change in future interest rate expectations by traders as well. Melloy writes: “Traders are now 100% certain the Federal Reserve will cut interest rates by September. There are now 93.3% odds that the Fed’s target range for the federal funds rate, its key rate, will be lowered by a quarter percentage point to 5% to 5.25% in September from the current 5.25% to 5.50%, according to the CME FedWatch tool. And there are 6.7% odds that the rate will be a half percentage point lower in September, accounting for some traders believing the central bank will cut at its meeting at the end of July and again in September, says the tool. Taken together, you get the 100% odds.” Prediction markets like Kalshi are also showing a significant increase in interest rate cut expectations recently. Odds now stand at 81% for a rate cut by September according to the market. Bitcoin, one of the best free market signals that we have, has increased in price by more than 13% over the last 7 days. This type of strength has historically been reserved for significant changes in investor expectations, which is obviously happening as Trump’s odds of victory continue to grow. So market participants are expecting interest rate cuts and the odds of Trump winning are kickstarting re-allocation of assets in various parts of the market, but I want to give a word of caution — we have seen plenty of false starts on various trades or trends in the past. For example, the Russell 2000 strength may disappear if these companies can’t produce the earnings necessary to support the current excitement. Interest rates will remain sticky with one hot inflation reading. And bitcoin can be volatile depending on who is tweeting at any given time. While it can be fun and exciting to try nailing the Trump Trade, the best investing strategy is usually to think long-term, minimize your trading/decision-making, and chill. Hope you all have a great day. I’ll talk to everyone tomorrow. -Anthony Pompliano Founder & CEO, Professional Capital Management Reader Note: Today is a free email available to everyone. 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