Trump is back slashing (or should we say: threatening) tariffs left, right and center.
The more gradual approach suggested by his inner circle is nowhere to be seen.
It seems like this Trump presidency will bring more volatility than the previous one.
And if you think about it, it actually makes sense.
Controlling the House and the Senate, Trump is empowered to run his last and more aggressive agenda: in Musk’s words ‘’it’s now or never’’ for implementing policies.
I feel like Trump has little to lose here, and he is calling the shots.
When it comes to markets, I believe it’s good practice to look at what happened in 2016.
The world isn’t the same, but Trump’s policies seem to move broadly in the same direction and even if history doesn’t repeat it often rhymes:
The chart at page 1 shows the Sharpe Ratio for the top 7 risk-adjusted trades in the 45 days subsequent to Trump’s surprise win in 2016.
We chose risk-adjusted returns over absolute returns to avoid giving an advantage to highly volatile assets like Bitcoin – in absolute return terms, the most volatile asset will always prevail given favorable conditions.
The 7 trades all make sense from a macro standpoint.
Stock markets and in particular small-caps and banks benefit from Trump’s economic and de-regulation agenda; yields move up as nominal growth is seen increasing; the US dollar strengthens against low yielders and countries hit by tariffs and Bitcoin acts as the perfect de-regulation friendly, animal spirit asset class.
Let’s now look at today.
We overlapped the 2024 performance with the 2016 performance for the top 7 ‘’Trump trades’’.
In choosing the ‘’day 0’’ for 2024 we opted for the day when the Republican sweep odds moved above 50% on Polymarket: at that point, a Red Wave was already priced as base case similar to November 9th 2016 when it was clear Trump had won.
Here is how the ‘’Top Trump Trades’’ look priced today:
Here are 3 observations from my side:
- 1) Trump Trades in the stock market are experiencing a milder rally than in 2016;
- 2) The FX market seems unimpressed too;
- 3) Bitcoin has front-loaded all the 2016 gains in less than half the time.
Every time there seems to be an obvious trade we should always ask ourselves why should it be so easy.
In this case: can we safely assume there is a lot of juice left in USD/MXN or stocks? Has Bitcoin already run its course?
For the Trump Trades in the stock market, one reason why we are lagging behind could be valuations.
The S&P 500 wasn’t nearly so expensive in late 2016 from a forward P/E perspective, and therefore a long stock position here relies heavily on earnings to deliver as valuations are already high.
In FX, I can explain USD/JPY – the Ministry of Finance in Japan limits the upside there.
But why would USD/MXN not trade much higher as it did in 2016?
It seems FX markets are leaning towards tariffs being used as a negotiating mechanism rather than actual sizable tariffs being imposed on several countries in the end.
I think FX markets are largely underestimating Trump 2.0 and the volatility he will bring.
But also remember that in the medium term, macro conditions >>> reaction to short-term political agendas:
The chart above broadens the perspective on Trump Trades and it looks at 180 trading days after a Trump victory became clear in 2016 and 2024.
Notice how:
- US banks and small caps almost flat-lined after the initial enthusiasm, while the S&P 500 kept going
- A short 10-year bond position lost money after the initial burst
- USD/MXN longs ended up losing (!) money after 180 trading days
- Bitcoin kept going vertical and the punchiest part of the rally only happened much later
In 2017, global economies exhibited a miraculous concerted global growth amidst disinflation.
When it comes to 2025, I am not so sure that should be the base case.
I think Trump 2.0 is very much focused on foreign policy, and that this time around tariffs will become an important macro theme that stays with us for a long time.
If I am right, Trump 2.0 might sacrifice some short-term growth in exchange for harsher tariffs to pressure foreign economies to ‘’rebalance’’.
The outcome would be an increase in short-term inflation expectations but coupled with weaker growth, and a Fed likely to ‘’look through’’ the inflationary threat from tariffs to protect the US economy.
If that unfolds: most financial assets suffer, bonds do ok, the USD acts as a hedge.
This was it for today, thanks for reading.
Feel free to share the piece with a friend or colleague.
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