Trump's "Super Week" comes to an end, will "re-inflation" trades take over?

Driven by Trump's victory in the election and the Fed's 25 basis point rate cut, the S&P 500 index closed near 6000 points last week, up 4.7%, marking the largest single-week gain in a year. Small-cap stocks in the U.S. also saw significant gains. Trump made a series of promises during the campaign, including increasing tariffs, tax cuts, deregulation, and stricter immigration laws, bringing new expectations and uncertainties to the market. Investors are actively seeking companies and industries that may benefit from these promises. In this context, Goldman Sachs Group, Inc. traders expect that after the trading market driven by the U.S. election ends, rotational pressure will continue to be a significant feature of the market as investors allocate funds to smaller companies and seek opportunities in cyclical/inflation themes. Inflation Resurgence The market has already digested one of the strongest inflation resurgence environments in at least 24 years. Goldman Sachs Group, Inc. strategists stated that positive macroeconomic data and election results have led to one of the largest monthly inflation resurgence shifts in asset classes since 2000. In this backdrop, Goldman Sachs Group, Inc. is bullish on gold and European bonds. Goldman Sachs Group, Inc. defines the shift in inflation resurgence by observing assets related to global economic growth (such as high-yield bonds) and assets affected by monetary policy changes (such as government bonds). A basket of inflation resurgence stocks from Goldman Sachs Group, Inc. has risen by about 7% since the end of September, with the highest weights on EMCOR Group (EME.US), Uber Technologies, Inc. (UBER.US) and United Rentals, Inc. (URI.US). Goldman Sachs Group, Inc. strategists led by Andrea Ferrario stated that in inflation resurgence periods over the past 20 years, it is worthwhile to replace the bond portion of a 60/40 investment portfolio with alternative investments. The strategists now favor gold and European bonds. They stated, "From now on, we continue to be bullish on gold because gold can serve as an important hedge against political risks and with the Fed's rate cuts and continued buying by emerging market central banks, there are positives. We also continue to be bullish on European bonds because different macro backgrounds and potential trade tariffs should support further widening of the yield spread between U.S. Treasuries and German bonds." Since early October, the yield spread between 10-year U.S. Treasuries and 10-year German bunds has widened by about 30 basis points. As for the stock market, Goldman Sachs Group, Inc. strategists stated that as long as rising bond yields are driven by more optimistic economic growth, the stock market should be able to withstand rising bond yields. They stated, "If real yields (relative to expectations for real GDP growth) start to rise, or if bond yields rise too quickly, rising yields may eventually restrain the stock rally." Small-cap stocks, cyclicals welcome spring? U.S. small-cap stocks seem to be in a favorable position. Most of these companies derive their revenue domestically, and they stand to benefit from the rise in protectionism. Potential corporate tax cuts would also help. Trump proposed imposing comprehensive tariffs of 10% to 20% on imported goods and up to 60% on goods made in China. The prospect of at least some tariffs being implemented drove the benchmark Russell 2000 index of small-cap stocks up 8.6% last week. Financial stocks are also seen as being in a strong position, as Trump promises to reform regulatory agencies implementing stricter banking rules under a Biden administration. Shares of Citigroup (C.US), Goldman Sachs Group, Inc. (GS.US), and JPMorgan Chase (JPM.US) surged after Trump's victory. Barclays U.S. equity strategist Venu Krishna stated, "The stock market eagerly digested Trump's domestic growth policies through small-cap stocks and hopes to bet on regulatory easing through financial and large tech stocks." Additionally, Barclays analyst team led by Emmanuel Cau stated that U.S. stocks, especially cyclical stocks, have the least resistance to rising if there aren't catalysts challenging a soft landing. Historical experience indicates that as long as there is no recession after a Fed rate cut cycle, these assets typically rebound steadily.