Time to fade the Trump trade, says BCA

Investing.com -- Investors may be misjudging the economic implications of Donald Trump’s return to the presidency, BCA Research notes, urging them to rethink the “Trump trade” narrative.

In a recent note, the investment research firm suggests that the market's expectations for a repeat of the growth and policies seen during Trump's first term are misplaced.

Market sentiment is buoyant, with the S&P 500 reaching new highs and investors shifting toward small caps and riskier assets. According to BCA, this optimism is rooted in the assumption that Trump will enact a similar set of growth-oriented policies, triggering another economic boom.

However, while the president may be the same, “the macro backdrop and political situation today are starkly different from 2016,” BCA stresses.

Specifically, the current economic landscape contrasts sharply with that of Trump's first term. In 2016, inflation was on an upward trajectory, and the Federal Reserve was transitioning into a rate-hiking cycle.

This time, inflation is on a downtrend, the Fed is easing rates, and economic indicators point to a slowing labor market and declining global manufacturing activity.

“Not only are [the macro backdrop and the political situation] different but they are pointing in the complete opposite direction to eight years ago,” the note states.

BCA also raises questions over the political feasibility of significant fiscal stimulus. While Trump’s initial tax cuts in 2017 were widely credited with boosting growth, the firm’s analysis suggests they had limited impact on investment.

“It is not the level but the change in the deficits that matters for growth,” the note writes.

“The deficits are already very large, which means that a big increase in the deficit from current levels is unlikely. Projections of the fiscal thrust are negative for next year,” it adds.

BCA strategists believe that investors betting on a repeat of 2017 are overlooking Trump's priorities. Inflation, rather than growth, is now the key political issue.

High inflation during Biden’s term dominated voter concerns in 2024, and strategists think Trump is unlikely to implement policies that might stoke further price pressures. The establishment of the Department of Government Efficiency (DOGE), headed by Elon Musk and Vivek Ramaswamy, also points to a more conservative fiscal approach.

From an investment perspective, BCA describes small caps, often seen as beneficiaries of fiscal stimulus, as “extremely levered,” making them vulnerable to rising borrowing costs.

The dollar’s recent momentum is also a concern, prompting BCA to reduce its exposure to the currency.

Overall, the firm sees risk assets as “overextended.” As such, it remains underweight equities and "defensively positioned."

Source: Investing.com