"The Trump Trade" in 2024: Are investors copying the answer from 2016?

As the US election approaches, the financial markets are once again playing out a familiar drama - the "Trump trade". Investors seem to be following the 2016 strategy, buying small-cap stocks and "old economy" stocks, hoping to replicate the market performance after Trump's unexpected election victory.

Just two weeks ago, the market focus was on artificial intelligence and tech giants. However, with inflation data cooling more than expected in June, coupled with an increase in support for Trump after the assassination attempt, small-cap stocks have surged, with the Russell 2000 index rising by 10% by last Wednesday, marking the strongest weekly performance relative to the Russell 1000 index. At the same time, the tech-heavy Nasdaq index saw its largest single-day percentage drop since December 2022.

These trends saw a reversal on Thursday and Friday, but the past week and a half still evoked reactions to Trump's unexpected victory in the 2016 presidential election.

However, analysts believe that Trump 2.0's attitude towards technology, antitrust, and the space for tax cuts are different from before, and the 2016 trading strategy may not necessarily apply to 2024.

But these rebounds have not been sustained. During Trump's four-year term, small-cap stocks performed poorly. Industrial, energy, and bank stocks all underperformed the S&P 500 index, while the US dollar and US Treasury yields eventually declined.

Tax cuts did indeed boost the stock market in 2018, but most of the net income growth went to the largest companies, with the tech industry being one of the biggest beneficiaries.

Last week, certain sectors of the US stock market did benefit from the logic of the "Trump trade", such as energy, manufacturing, and financial sectors, especially regional banks, which performed strongly due to expectations of reduced regulatory scrutiny.

However, some analysts point out that notable differences may mean that the 2016 strategy may not apply to 2024.

For example, Trump's relationship with the tech industry has become relatively friendly, as he has gained public support from Musk and selected former venture capitalist JD Vance with a Silicon Valley background as his vice presidential candidate.

Similarly, analysts suggest that if the Trump administration's enthusiasm for antitrust is not as strong as the Biden administration's, large tech companies may benefit. For oil and gas giants, the benefits of lower environmental barriers may be offset by production surpluses.

Moreover, even if Trump is re-elected, there is limited room for further tax cuts. The 2017 "Tax Cuts and Jobs Act" reduced the highest corporate tax rate in the US from 35% to 21%, and analysts believe that due to the much higher current budget deficit, Trump's further tax cuts can only go down to 20%