Global financial markets, including those of Israel, strongly depend on trends coming from Wall Street. Almost one month has passed since Donald Trump’s arrival at the White House for his second term and there have been some key surprises.
In contrast to most predictions, over the last few weeks we have seen main equity and fixed income indices that are muddling through, without a clear trend. There can be no doubt that there has been a significant increase in the degree of market uncertainty regarding the state of economic fundamentals in the months to come. At the same time, stock markets in the Eurozone are rising and providing very nice returns, a fact that is generating an increase in capital flow to that area.
A clear investment recommendation by major banks and advisers, even before the November elections was the so-called “Trump trade.” The advice was to go long on US equities, preferring these to those of other areas, and long on the US dollar, yet short US Treasuries.
“Trump trade” positions provided reasonable returns during some weeks before and after the elections, yet in recent weeks, markets have moved in the opposite direction of such trade. In particular, over the past three months since mid-November, the S&P 500 index has exhibited fluctuations around a level of 6,000 points with no major trend. Obviously, it is hard to complain about this fact given that this level is relatively high from a historical standpoint and it is not far away from the historical record high level of 6,127 points reached back in January 2023.
Trump trade
Turning now to the behavior of US Treasury yields, there was a wide consensus before the elections that at least the first year of the new administration will introduce tax cuts and new spending that could increase the federal deficit and federal debt as a percent of GDP. With this in mind, many investors decided to short these Treasuries. As a matter of fact, from the time of the elections up to the middle of January we saw a rise in the yields to maturity on 10-year treasuries from 4.46% to 4.80% per year. Yet, over the last month, yields came down to about 4.50%, a level quite similar to that by mid-November.
As for the US dollar, the Dollar Index (DXY) showed a strengthening of the currency from the time of the elections up to a month ago, and since then we have seen some depreciation in the value of the currency.
In sum, the current situation is one in which the “Trump trade” is no longer attractive, at least for the time being, and instead markets are showing an important degree of confusion and search for the next source for potential market upside. Interestingly, this is happening precisely at a time that Q4 quarterly reports of S&P 500 companies are very good.
Overall, at a time that S&P 500 has increased year to date by about 2.5%, Euro Stoxx indices have risen by about three times this return and the value of the euro in terms of US dollars has shown very little change since the start of the year.
Although the election of Donald Trump as president of the United States was widely welcome by Wall Street investors, apparently something else has happened since January 20. It seems that the highly frequent general announcements by Trump about key issues such as tariff and immigration policies have raised market uncertainty. Some of these announcements have been often reversed, as it happened with tariffs from imports coming from Canada and Mexico.
Economists and analysts are extremely worried, and rightly so, about the possibility of a global trade war that could result in a decline in growth, a rise in inflation, a fall in the volume of international trade, and a rise in geopolitical risks. An important component of the current market concerns is Trump’s plan to raise tariffs on imports from Europe and China, which could also face retaliatory measures of from those areas.
Obviously, the current high uncertainty about the specific details of Trump’s policies on key issues such as international trade is accompanied by relatively high uncertainty about the path of inflation and Fed rates in the months to come.
In the meantime, many investors will opt for a wait-and-see attitude with the hope of accumulating more information in the near future. Accordingly, they may prefer staying with their current portfolio positions rather than making abrupt changes.
The sooner Wall Street and the US economy get a clearer view of the details of economic policy under the new administration, the better will this be for everyone involved in these matters.
The writer is CEO of Peilim Portfolio Management.