Bank of America Analyzes 'Trump Trade'

Investing.com — In a recent note to clients, Bank of America strategists delved into the economics of the "Trump trade," examining how the election outcome has spurred dramatic market reactions and may shape the economic landscape in multiple ways.

Following Trump’s win in the 47th US presidential election, markets saw sharp increases across equities, Treasury yields, and the US dollar, reflecting investor expectations of significant policy changes.

BofA said its US economics team outlined "three clear lessons" from these market reactions:

1. Expectations of Increased Tariffs
   The market anticipates a substantial increase in tariffs, contributing to higher breakeven inflation, especially at the short end of the yield curve. Strategists explained, "Markets appear to be anticipating a large increase in tariffs in the near term, evident from the rally in the dollar and the pronounced pickup in breakeven inflation at the front end of the yield curve."

2. Shift Toward Higher Policy Rates
   BofA highlights the likelihood of a structural shift toward higher policy rates in the medium term due to expectations of Trump’s fiscal policies, including increased government spending. This may lead to higher Treasury issuance and a wider federal deficit, raising nominal and real yields, particularly at the longer end of the curve. Investors anticipate that the Federal Reserve may counterbalance what BofA terms “a chronically easy fiscal stance.”

3. Impact of Deregulation on Equity Rally
   Strategists underscore how Trump’s deregulatory agenda is boosting the equity rally, especially in the Financials and Energy sectors. The significant movements in these sectors indicate investor enthusiasm for expected regulatory rollbacks. Financials, noted as “the biggest winner of the day,” and energy stocks saw substantial gains from hopes of a more favorable regulatory environment. Strategists noted, "These sectors are likely to benefit from deregulation under Trump, and the size of the recent moves suggests markets anticipate significant tailwinds from changes in the regulatory landscape."

BofA believes the Trump trade has sector-wide implications. For smaller-cap companies, potentially disproportionately affected by tariffs, rising rates, and inflation, the outlook may be mixed. However, M&A opportunities for SMID banks, IT, and healthcare could provide some support.

Meanwhile, industries heavily reliant on imported goods or labor, such as construction and restaurants, may face challenges from tariffs and stricter immigration policies, potentially increasing costs in these labor-intensive sectors.