With President-elect Trump preparing for a second term, his policies spark optimism, building expectations of corporate tax cuts, regulatory easing, and increased infrastructure spending. Investors are positioning for a market boost similar to his first term, with stocks in financials, energy, and industrials particularly benefiting from anticipated policy changes. However, while this spark of optimism is strong, it’s tempered by higher inflation compared to 2016, which may limit the Fed’s ability to keep rates low. Trump’s proposed tax and spending policies could fuel growth but may also strain inflation, as the Federal Reserve remains cautious about rate cuts due to inflation pressures.
Source: Chip Somodevilla
Since Trump’s election victory, U.S. markets have seen substantial gains, with the S&P 500, Dow Jones, and Nasdaq all reaching record highs as investors bet on pro-business policies that spark optimism about boosting corporate profits and economic growth. Volatility, as measured by the VIX, has dropped, reflecting reduced uncertainty in the near term. However, there is an underlying caution as investors remain mindful of the potential for longer-term inflationary impacts from Trump’s proposed policies.
Trump's Return Signals Tensions in U.S - China Relations
The return of Trump brings a renewed focus on U.S.-China relations, which are likely to experience further strain. Recent U.S. actions, such as ordering TSMC to halt chip shipments to China, highlight a tougher stance on technology exports. This policy could bolster U.S.-based semiconductor companies, but it also risks escalation with China, potentially impacting sectors reliant on international trade. Additionally, European and Chinese markets are reacting to the election results, with bond markets and global trade flows potentially adjusting to anticipated shifts in U.S. policy.
Source: NBC News
Investors Adjust Strategies as Bond Market Fluctuates
While stocks are benefiting from market optimism, the bond market is facing challenges as investors brace for potential inflation under Trump’s administration. The 10-year Treasury yield recently spiked to 4.32%, and long-term bond funds, such as iShares 20+ Year Treasury Bond ETF, experienced price declines. Advisors are responding to bond market instability by diversifying across bond types or shifting to shorter maturities and floating-rate funds. For instance, shorter-duration ETFs like iShares 1-3 Year Treasury Bond and Vanguard Mortgage-Backed Securities ETF offer some protection from interest rate fluctuations while maintaining income generation.
WATCHOUT
Berkshire Hathaway Trims Stocks, Increases Cash Reserves
Warren Buffett’s Berkshire Hathaway has been reducing its stock positions, particularly in high-profile stocks like Apple and major banks. This conservative approach reflects Buffett’s caution amid market highs, with the company’s increased cash reserves positioning it to capitalize on any correction if Trump’s policies lead to inflation or a potential market pullback.
Investment Opportunity & Risk
McDonald's Corporation (MCD)
As a dividend growth leader, McDonald‘s stability aligns well with investors seeking reliable returns amid potential market shifts. The company is close to achieving Dividend King status, making it attractive to those prioritizing consistent growth in a volatile market.
- The combination of the considerable higher implied volatility on puts and concentrated put volume at the 280 strike indicates a cautious or bearish outlook. The high demand for puts at lower strikes suggests that investors may be positioning for potential downside risk, likely hedging against a price drop or expecting volatility on the downside.
- Given the bearish skew in implied volatility and the high concentration of put volume, it’s likely that the stock could experience downward pressure or limited upward momentum in the near term. The market sentiment reflected in this chart leans toward caution, with participants hedging against possible declines. Thus, a conservative expectation would be for the stock to either trend downward or remain range-bound with a bearish bias.
However, the recent sharp decline in put implied volatility has somewhat softened the market’s bearish outlook on the stock.
Intel Corporation (INTC)
Intel‘s recent performance suggests a turnaround may be underway, with increased interest in long-dated in-the-money call options as investors anticipate growth. Trump’s potential for stricter policies on China could benefit Intel and other domestic semiconductor manufacturers as they may capture a greater share of the market.
Call volume is notably higher around the 28 to 30 strike prices, while put volume is more evenly spread, with some concentration around the 22 to 26 strikes.
The high call volume at upper strikes may suggest that some investors are positioning for potential upward movement, as they may expect the stock price to approach or exceed these strike levels.
Based on this data, the stock could see some upward movement in the near term, with a moderate bullish sentiment supported by call buying at higher strikes.
Overall, a cautious but slightly bullish outlook seems reasonable, with potential for the stock to inch upwards while remaining susceptible to swings or dips if market sentiment shifts.
Axon Enterprise (AXON)
Axon saw a significant stock rally following Trump’s election, due to expectations of a supportive policy environment for domestic industries like defence and technology. Axon’s recent increase in revenue projections bolsters its outlook, as Trump’s policies may favour U.S.-based tech and security firms.
CONCLUSION
- The “Trump factors” spark optimism in the U.S. stock market, with investors preparing for an environment that could stimulate economic growth through corporate tax cuts, deregulation, and spending.
- However, these policies may also bring inflationary pressures, which could prompt a cautious stance from the Fed.
- While stocks in sectors like finance, energy, and defense are expected to benefit from Trump’s pro-business agenda, global tensions, especially with China, could create headwinds.
- Strategic stock selection remains crucial, with dividend stalwarts like McDonald’s and potential turnaround stories like Intel offering resilience in an evolving economic landscape.
Please note that all information in this newsletter is for illustration and educational purposes only. It does not constitute financial advice or a recommendation to buy or sell any investment products or services.
About the Author
Rein Chua is the co-founder and Head of Training at AlgoMerchant. He has over 15 years of experience in cross-asset trading, portfolio management, and entrepreneurship. Major media outlets like Business Times, Yahoo News, and TechInAsia have featured him. Rein has spoken at financial institutions such as SGX, IDX, and ShareInvestor, sharing insights on the future of investing influenced by Artificial Intelligence and finance. He also founded the InvestPro Channel to educate traders and investors.
Rein Chua
Quant Trader, Investor, Financial Analyst, Vlogger, & Writer.
