BCA Research states that the market's expectation of another period of supercharged growth under Trump's leadership is misguided, and thus risks should be avoided.
Since Trump won the election earlier this month, U.S. stocks have nearly all risen, with the S&P 500 up nearly 2% since election day, and investor exposure to U.S. stocks has surged to an 11-year high. Traders are betting that Trump's proposals for broad deregulation and corporate tax cuts will boost corporate profits, especially for so-called Trump trades like bank stocks.
However, the aforementioned research firm stated that these proposed policies may not have as significant an impact on the market as they did when Trump first took office.
BCA Research strategist Juan Correa stated, “The market expects Trump to implement a series of policies that will allow the economy to grow like it did in 2017. But we believe the consensus is wrong.” He pointed out that the current economic backdrop is starkly different from when Trump began his first term.
When Trump first took office in 2017, he faced rising inflation and the beginning of a Federal Reserve interest rate hike cycle. This time, both inflation and interest rates are declining. Correa says this has shifted the Fed's focus to the labor market, which is already showing signs of deterioration.
Meanwhile, global growth seems to be declining.
“Those betting on a repeat of the 2017 scenario are making judgments based on data from 8 years ago,” Correa said.
Some investors might argue that Trump's policies could reverse the current macro trends, just as the policies he implemented during his first term to support economic growth and inflation did, especially given the current situation where the Republican Party has swept both houses of Congress.
However, Correa believes this notion may be overestimated. In his view, it is still unclear whether Trump's tax cuts were truly the core of the 2017 economic growth. He also believes that this time it will be more difficult for Trump to achieve additional growth through government spending. He said the deficit is already so large that a significant increase at current levels is unlikely, and the forecast for next year's fiscal situation is already negative.
In short, traders are viewing Trump through the lens of his past term rather than the adverse situation he faces now.
Correa said, “Investors are considering individual factors rather than macro factors. Worse, they are considering situations from eight years ago. Therefore, we believe some assets are overextended,” referring to small-cap stocks, the dollar, and risk assets.
Correa suggests adopting a defensive strategy, selling stocks and buying bonds. He said, “We are still reducing our stock holdings and maintaining defensive positions. Even in a soft landing scenario, the 10-year U.S. Treasury will rebound 12% from current levels next year.”
Article reposted from: Jin Shi Data
