The Stock Market Is About to Look a Lot Like Trump, and No One Should Know What that Means

Disclaimer: As always, when I lean on my finance degree to write about the stock market, it is not financial advice.

The Trump trade has been a common theme in the markets all year, sparked in large part by Joe Biden’s calamitous debate. According to Barack Obama’s former speechwriter Jon Favreau, the Harris campaign discovered that Biden’s own polls had Trump winning 400 electoral votes in the wake of that disaster, and market-makers and influencers undoubtedly saw something similar in their data. I wrote about Morgan Stanley and Barclays traders betting on slower growth and faster inflation after the debate, which along with high unemployment form the magic cocktail to create stagflation, the worst thing that could happen to an economy and something which was once thought impossible until the 1970s proved otherwise.

But if there is anything we have learned in this post-2020 world, it’s that the stock market is not the economy, as yet again under a Democratic president, Wall Street recovered faster than Main Street from an economic crisis. I wrote about outside forces like Watergate, Clinton’s charisma, bad economies and Obama’s populism winning elections in spite of the Democratic Party earlier today, and while I am trying to be patient with takes on the specifics of what led to this election until we get more data, I do believe in my gut that Trump also won in spite of himself with a big assist to an unfair economy still hurting people that the Democrats have long been unresponsive towards. Change elections driven by events larger than presidential elections are a powerful thing.

And the stock market has been preparing for a change election for some time. As Reuters noted in their writeup accepting that “there may be no durable Trump trade.”

If true to his word, it was assumed, Trump’s promises of corporate tax cuts, tariff hikes and immigration curbs would expand an already vast budget deficit, whack Treasury bonds and flatter firms’ bottom lines and stock prices.

At the same time, investors also bet that the unintended consequences of tariff hikes and immigration crackdowns could rekindle inflation, hamstring the Federal Reserve’s monetary policy easing campaign and push both the interest rate horizon and the dollar higher.

This meant that the dollar, S&P 500 and the Russell 2000 comprised of small stocks should all rise in value, while European stocks, treasury bonds, and emerging markets should be hurt by Trump’s tariffs, and since the election, all those markets have moved in their assumed up or down direction. Others like banks, energy companies and private prisons have also gone up this year in anticipation of being beneficiaries of the Trump administration.

But as Reuters correctly points out, assuming that these assumptions will endure through the actual governance of a Trump term may be a fool’s errand for those agreeing with takes like Investor’s Business Daily’s that “the Trump trade is back. There’s still money to be made in these 3 hot sectors.” In IBD’s defense, they don’t put a timeframe on this analysis and recent market movements have proven them right, but there are two main issues with trading the future on Trump’s words at this point. The Trump trade just isn’t a static notion.

First, Trump is a liar who doesn’t give a shit about anyone but himself, so assuming that he really cares about America’s energy independence or increasing mergers and acquisitions or any other ideology of the right is dangerous. Trump looks at the whole world through the lens of a discount mob boss forcing everyone to pay him patronage, and so the lone financial advice I would be willing to dispense of here is that if you know who is paying Trump the most bribes, bet the house on them.

Second, macroeconomics is difficult to predict under even the best circumstances, and we uh, do not have that. The global economy is still ringing like a bell from the reverberations of the 2020 supply chain shock, and Trump’s election presents a level of uncertainty to markets unmatched since then. The pandemic changed the economy in dramatic ways, and it was the primary driver behind the spike in inflation over the following years. Had the Federal Reserve done nothing this entire time, inflation still would have fallen far down on its own just from the supply chains unconstricting themselves, which they are still in the process of doing.

Speaking of the Fed, they also poured cold water on the enduring notion of this specific Trump trade the markets have been making. The interest rate hiking cycle has ended, and now the question is how quickly to lower rates and to what benchmark. The word of the day out of their latest post-election meeting was “uncertainty,” as they did not explicitly name Donald Trump, but that is what they were clearly getting at in addition to the economic uncertainty recently introduced by strikes, hurricanes and other factors. Biden has delivered a good economy on the fundamentals even if most everything is still way too expensive for most people, but Trump is a fundamental policy change away from what has proven to work to some degree in this post-2020 world. Like it or not Trumpers, the Trump trade right now is successful in part thanks to Joe Biden’s economy pushing the entire market up this year.

The Trump trade going forward is likely going to be subject to Trump’s whims. He really seems attached to this idiotic tariff thing, and I think the litany of people in the market who assume that it is some negotiating ploy and not one of his few firmly held beliefs that aligns with discount mafia Don are exposing themselves to a lot of downside risk. There will be money to be made in markets because the Republicans are the party of reactionary capital, but I think those who assume the stock market is destined for more up only movement under Trump are missing the full picture here.

The conservative AEI institute is no oracle, but as an organization solely dedicated to hatred of all taxes, they do have a level of expertise on this subject, and they believe that Trump’s tariffs will cost America $3.9 trillion over the next ten years. If we assume an average GDP growth rate of two percent over the next ten years, that means America in total would generate $342 trillion in GDP by 2034, with Trump’s tariffs sucking 1.1 percent out of those gains. While that may not sound like much, one policy being a drag on over one percent of GDP under good conditions in the most powerful economy in the history of mankind is actually quite a lot.

And there’s not much reason to believe that these blanket tariffs and his mass deportation plan will result in good economic conditions, per most of the smart people who literally put their big money where their mouth is all day for a living. I would be willing to bet AEI’s much more scientific analysis has them costing more than 1.1 percent of GDP, and the Tax Foundation’s one has long-run GDP growth pegged at just 0.8 percent under Trump’s tariffs.

Which means that the up only “easy mode” markets that traders have largely enjoyed since 2008 are gone forever. This was true already because of the death of zero-interest rate policy and the sugar high it gave the markets, but Trump has proven to introduce a level of volatility typically only brought by economic contractions and other macroeconomic events. While there are Trumpers who would no-doubt point to the S&P’s growth in 2017, 2019 and 2020 of 19.42 percent, 28.88 percent and 16.26 percent as proof that markets certainly still function normally under Trump, I would point to 2018 as the canary in the coal mine. This is when Trump first imposed sweeping tariffs which every analysis you can find revealed to backfire, and the market finished down 6.24 percent on the year.

Markets operate on the premise that a rising tide lifts all boats, and one look at the Dow Jones Industrial Average since 1896 proves this to be objectively true. Up only is the long-term market trend under any economic regime. And while the stock market is not the regular economy, Trump is a corrupt disruptor who has proven to pretty consistently buck trends at this point. Before 2018, the last year the S&P finished negative on the year was 2015, driven largely by the massive global stock selloff that was led by the major Chinese SSE Composite Index falling a staggering 43 percent in two months. Before that was 2011, where the S&P was basically flat as we were still recovering from the Great Financial Crisis, which along with the three-year tech bubble bursting from the most expensive stock market in history and the 2022 interest rate-driven pullback, were the only other times this century that the stock market finished down on the year. Aside from these broad-based economic contractions, the market declined over six percent just one other time between 1983 and 2018 (1990).

Which means that Trump has proven his policy does have a unique impact on the markets and he himself presents downside risk that other presidents don’t. Two out of his first four years as president, the market saw declines that were out of the ordinary, and the market is kidding itself if it thinks that’s not possible again. The Russell 2000 finished down 21.56 percent on the year in 2018, proving that some accepted wisdom about what Trump will mean for markets does not match the corrupt and confused reality he presents. To put the risk of stagflation in terms the market can understand, from 1972 to 1979, the S&P 500 was up a total of a little over six percent. I don’t know where markets will go in the next four years, but I do believe that Trump’s policies passed under this Republican trifecta are going to tell us a lot about what they will look like going forward.