Trump May Dislodge “U.S. Exceptionalism Trade”
Savvy vegetable gardeners understand the first hard frost is a game changer for the home-grown food plot, introducing a whole new growing environment. Such a shift may be occurring in the global stock market dynamic that has been dominant in recent years. The “U.S. exceptionalism trade”, in which American stocks have soared while global stock prices have remained subdued, has reversed sharply since the swearing in of Donald J. Trump as 47’th President. What force is behind this changing investment theme, and will it continue or reverse?
The consensus opinion suggested President Trump’s business-friendly administration would give further advantage to U.S. stocks over foreign equities. While this thesis may prove true in the longer term, there is a more relevant factor playing out today. The "twin deficit"—the U.S. trade deficit and federal budget deficit—has played a major role in inflating U.S. asset prices. This cycle works by the U.S. borrowing money to purchase foreign goods, with trading partners then reinvesting that money into U.S. assets, fueling stock market growth. Historical trends show that when the twin deficit grows, U.S. stock prices rise, but when it contracts (as in 2022), markets suffer significant declines.¹
The Trump administration's efforts to reduce both the U.S. trade deficit and federal budget deficit may lead to a decline in high U.S. asset prices in the short-term. While the President’s tariff policy is aimed at upending the trade deficit, a reduction in the federal budget deficit could come from Elon Musk and his "Department of Government Efficiency" (DOGE) implementing significant spending cuts.² The first half of President Trump’s second term may involve the market discovering which of the President’s arguments are negotiation tactics aimed at gaining concessions, and which are convictions he will indeed act on. The universally dismal record of historical tariffs has the financial world hoping Trump’s tariffs are short-lived, and that a full-blown trade war is averted. The issue of whether ‘The Administration’ allows DOGE savings to marginally reduce government deficits or uses it as an opportunity to “give” cash to American consumers (to prevent a reduction in U.S. consumption), is worthy of our attention due to its effect on earnings and stock prices.
While we applaud the reduction of government overspending and waste, we don’t want to be ignorant of the pain the corrective process requires. The savvy gardener is acquainted with the ‘first frost date’ in their respective zone and watches daily temperatures closely as it approaches to ensure a successful transition into the winter gardening season. As investors we want to do the same as we wait for these two issues to play out by:
Watching for a market rotation away from U.S. equities.
Keeping a short leash on high valuation securities.
Staying alert to policy changes that could affect trade and corporate profitability.
Think about it and may God bless your gardening and investing efforts!
Shaun
“Be wise as serpents, and innocent as doves” ~Mathew 10:16
1,2 Porter & Co., The Big Secret on Wall Street, “A One-Two Punch to U.S. Stocks”, February 27, 2025
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