Both stocks and currencies rise, while U.S. bonds plummet! Is this "Trump trade" really correct?

Locking in the victory of the U.S. election in advance, Trump's deal makes a comeback. On Wednesday, all three major U.S. stock index futures surged, the dollar and U.S. Treasury yields soared, and Bitcoin rose strongly. All these reactions align with Trump's promises: cutting corporate taxes boosts U.S. stocks, increasing tariffs creates a strong dollar, expanding the fiscal deficit means rising U.S. Treasury yields, and deregulation helps bank stocks and Bitcoin rise. However, whether these subconscious market reactions are correct in the long run is another matter. Noted financial commentator and Wall Street Journal reporter James Mackintosh pointed out in his article on Wednesday that the following four major issues are worth investors' attention: There is still uncertainty about whether the Republican Party can control the House of Representatives; Trump's immigration and tariff policies have negative impacts on the U.S. economy; Compared to Trump's first term, U.S. stocks are already very expensive; Will traders repeat the mistakes of 2016 and misjudge the market trends after Trump's rise to power? 1. Uncertainty in the House of Representatives elections The Republican Party has regained control of the Senate. Mackintosh believes that if they further control the House of Representatives, it will clear some obstacles for Trump to fulfill his promises. Conversely, without sufficient majority support for tax cuts or increased spending, the promise to improve the fiscal deficit by raising tariffs effectively amounts to a significant tax increase. This approach raises questions about the logic of rising U.S. Treasury yields. On Wednesday, the 30-year U.S. Treasury yield rose by as much as 23 basis points, marking the largest single-day increase since 2020. This indicates that the U.S.'s out-of-control fiscal deficit will continue indefinitely. 2. The impact of Trump's two main policies—immigration and tariffs—on the U.S. economy First, regarding immigration policy. If Trump fulfills his promise to deport millions of illegal immigrants, it could create a massive supply shock to the U.S. labor market and reverse the trend of a gradually cooling labor market, which is akin to putting the Federal Reserve on the hot seat in terms of interest rate cuts. Mackintosh states that a return to a supply-constrained job market means rising inflation and slowing economic growth, which is not good news for U.S. stocks. Additionally, renewed inflation concerns could push U.S. Treasury yields higher, which is also unfavorable for U.S. stocks. As for the promise of high tariffs, it has had a textbook effect on boosting the dollar. The Bloomberg Dollar Index hit a one-year high, while foreign currencies such as the euro, South Korean won, and Mexican peso all fell. Analysts believe that if Trump continues to implement comprehensive high tariffs, the dollar could receive even stronger support Mackintosh believes that one possible consequence is that Trump's tariff increases could fully ignite a trade war, which may partially offset the positive impact on the dollar. Due to the significant trade deficit in the United States, the losses from a trade war may be smaller for the U.S. than for other countries. Even so, the consequences of a trade war would be mutually damaging, and U.S. economic growth would also be affected, which could suppress U.S. stocks and lower U.S. Treasury yields—this again contradicts market assumptions. 3. Compared to Trump's first term, U.S. stocks are already very expensive The current price-to-earnings ratio of the S&P 500 index is 22 times, whereas in 2016, the P/E ratio of the S&P index was 16 times. Similarly, the yield on 10-year U.S. Treasuries is 4.4%, compared to 1.8% in 2016, and the ICE dollar index is 105, while it was 97 in 2016. Therefore, as Mackintosh states, if investors feel even slightly disappointed with the direction or pace of Trump's policies, it could harm the above markets. 4. For the market after Trump's inauguration, did traders get the answers wrong? In this election cycle, be wary of whether traders' bets have deviated. Historically, during the 2016 election, traders were completely wrong in their predictions about Trump at least twice. After Trump's unexpected victory, U.S. stock futures experienced massive sell-offs, hitting the limit down overnight with a drop of 5%, which now appears to be a completely wrong bet. Moreover, U.S. Treasury yields and the dollar soared for the remainder of that year as the market prepared for Trump's inauguration in January. However, the dollar plummeted throughout 2017, and U.S. Treasury yields and stocks fell back