"Trump trade" is still hot, but how long can it last?

After winning the U.S. presidential election last week, assets such as the U.S. dollar, U.S. stocks, and Bitcoin, are considered part of the "Trump trade" and have surged. Currently, the "Trump trade" still dominates the market, with Trump's economic agenda of tariffs, tax cuts, and deregulation expected to bring significant fluctuations to the global investment landscape. As Trump attempts to break all norms from free trade to the independence of the Federal Reserve, this era may become even more turbulent. However, investors are concerned about how far the "Trump trade" can go. Stocks, corporate bonds, and other assets have become expensive relative to historical levels, and Trump's trade protectionism policies may lead to a resurgence of inflation and force the Federal Reserve to maintain high interest rates for a longer period of time. Additionally, the U.S. economy faces expanding fiscal deficits and a labor market that is already showing signs of fatigue, which may put pressure on economic growth prospects. The concept of the "Trump trade" gained popularity after Trump first won the presidential election in 2016, with U.S. stocks and the U.S. dollar soaring similar to the situation after this month's election. Similar to eight years ago, expectations of regulatory easing boosted bank stocks, while optimism about tax cuts and investment-related policies drove small-cap stocks significantly higher. Overall, these movements indicate that investors have confidence in the Trump administration's policies aimed at stimulating economic growth and corporate profits. However, the response of the fixed income market this time is different from eight years ago. The yield on the 10-year U.S. Treasury bond rose significantly on the first trading day after the election, then fell over the next two trading days before rising again. This volatility reflects market participants' doubts about the next steps of the "Trump trade". To make matters worse, the Federal Reserve is currently in a loose monetary policy cycle. Given Trump's pledge to implement a regulatory agenda favorable to digital assets that could change the game and establish a Bitcoin strategic reserve for the U.S., cryptocurrencies are a key component of this "Trump trade". All of this has prompted short-term traders and institutional professionals to invest billions of dollars in digital currencies, pushing Bitcoin and other digital currencies to record highs. It is difficult to say how long the "Trump trade" will last. In the months following the 2016 election, the momentum of the "Trump trade" began to fade. During the 2020 election, various aspects of the "Trump trade" a strong U.S. dollar, rising U.S. bond yields, strong performance of bank stocks and small-cap stocks were largely influenced by the pandemic, either giving back gains or being reversed. The U.S. economy and market are at a more mature stage than eight years ago. The price-to-earnings ratio of the S&P 500 index is 26 times, 35% higher than in 2016. This leaves little room for a new round of valuation-driven rally and raises the threshold for Trump's policies like tax cuts to boost corporate profits. More importantly, tax cuts without corresponding spending cuts may lead to a rebound in inflation, which could force the Federal Reserve to reconsider its plans to continue lowering interest rates. The recent fluctuations in U.S. bond yields reflect these concerns.