① Since Trump won the election, the S&P 500 index has risen nearly 2%, and US stock exposure has reached an 11 year high. Investors are betting that Trump's relaxation of regulations and tax cuts will boost corporate profits BCA Research stated that the current economic background is vastly different from when Trump first took office, and his policy influence may be overestimated. Investors are pursuing the "Trump deal" like carving a boat for a sword.
Since Trump won the election earlier this month, driven by the so-called "Trump trade," US stocks have almost risen across the board: the S&P 500 index has risen nearly 2% since election day, and US stock exposure has reached an 11 year high.
Almost all US stock investors are widely betting that Trump's proposals for extensive regulatory easing and corporate tax cuts will boost corporate profits, thereby driving up the US stock market.
But BCA Research has stated that after Trump officially takes office next year, the policies he is currently proposing may not have the same significant impact on the market as when he first took office - investors' pursuit of the "Trump deal" is actually a case of carving a boat for a sword.
The economic background has completely changed
The market expects Trump to enact a series of policies that will revive the growth of the US stock market like in 2017. However, we believe that this consensus is wrong, "said Juan Correa, a strategist at BCA. He pointed out that the economic background when Trump took office this time was completely different from the beginning of his first term.
When Trump first took office in 2017, he faced the rising inflation in the United States and the beginning of the Federal Reserve's interest rate hike cycle. However, this time, both the inflation rate and interest rates in the United States are decreasing. Correa believes that this has focused the Federal Reserve's attention on the labor market, which is already showing signs of deterioration. Meanwhile, global economic growth seems to be declining.
Correa said, "Those who bet on a repeat of the 2017 scenario are based on data from 8 years ago
The impact of Trump's policies has been overestimated
Some investors may believe that Trump's policies, such as the pro growth and inflation policies he implemented during his first term, could reverse the macroeconomic trend mentioned above, and with the Republican Party winning control of the US Congress, the likelihood of these policies being implemented is particularly high.
But Correa believes that the impact of these policies may be overestimated. In his view, it cannot be confirmed whether the core of the US economic growth in 2017 was Trump's tax cuts policy.
Moreover, during Trump's second term, if he wants to create additional growth through government spending again, he will face greater difficulties - because the US deficit is already so large that it is almost impossible to make significant fiscal spending increases at the current deficit level.
In short, Correa believes that the traders of the "Trump deal" are actually judging Trump's next term based on his past performance, but ignoring the unfavorable situation he is currently facing - this behavior is tantamount to carving a boat for a sword.
Investors are betting on this person (Trump) without considering the macro background. Even worse, they are not betting on the person today (Trump), but on the person eight years ago. Therefore, in our view, some assets have been overvalued, "Correa said, referring to recently rising small cap stocks, the US dollar, and risky assets.
Correa suggests investors adopt a defensive allocation strategy, selling stocks and buying bonds.