The financial markets have entered a new phase following the U.S. presidential election. After an initial surge in equities and Bitcoin—driven by optimism around Donald Trump’s victory—recent weeks have seen a reversal. U.S. stocks, particularly cyclical and small-cap sectors, are retreating. Bitcoin has pulled back from its highs, while gold and Treasury yields are climbing. The so-called “Trump trade,” once a powerful market narrative, is now showing signs of fragmentation.
This shift raises a critical question: Why is the “Trump trade” partially unwinding—even before Trump officially takes office?
The Changing Face of the "Trump Trade"
When Trump secured a decisive electoral win and Republicans gained control of both chambers of Congress, markets reacted strongly. Investors priced in aggressive tax cuts, deregulation, and pro-growth policies—hallmarks of the original “Trump trade” seen in 2016–2017.
In the immediate aftermath, the S&P 500, Nasdaq, and Dow Jones all rallied. Bitcoin surged past $90,000. The U.S. dollar strengthened, and 10-year Treasury yields climbed toward 4.8%, reflecting rising inflation expectations and reflationary sentiment.
But by December 2024, the momentum stalled.
As of January 10, 2025, all three major U.S. indices were in negative territory for the year:
- Dow Jones: Down 1.42%
- S&P 500: Down 0.93%
- Nasdaq: Down 0.77%
Meanwhile, Bitcoin retreated below $100,000, and gold began to rebound—signaling a shift in risk appetite.
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Why the Reversal? Three Key Drivers
1. Fed’s Hawkish Pivot Disrupts the Narrative
The turning point came after the Federal Reserve’s December 2024 meeting. Despite earlier expectations of rate cuts in 2025, the Fed struck a surprisingly hawkish tone.
Chair Jerome Powell emphasized that inflation remains sticky and that the central bank would not hesitate to maintain higher rates—or even hike—if needed. This dashed hopes for near-term monetary easing.
Since mid-September 2024, when the Fed began signaling a dovish shift, the 10-year Treasury yield has risen over 100 basis points—a rare move historically. According to Deutsche Bank, this is the second-worst performance for long-term Treasuries during a Fed easing cycle since 1966.
Higher yields increase borrowing costs for companies and reduce the present value of future earnings—hitting high-growth, long-duration assets like tech stocks hardest.
“Markets are no longer pricing in rate cuts—they’re pricing in higher-for-longer,” says Zhong Zhengsheng, Chief Economist at Ping An Securities.
2. Trump’s Policies Carry Inflationary Risks
While Trump’s promises of tax cuts and deregulation are pro-growth, other policies—such as sweeping tariffs and mass deportations—could push inflation higher.
Tariffs increase import prices; reduced labor supply from immigration crackdowns could drive up wages. Both are classic supply-side inflation drivers.
This creates a dangerous mix: fiscal stimulus meets constrained supply, raising the specter of stagflation—economic stagnation paired with high inflation.
In such an environment, the Fed may be forced to keep rates elevated, undermining corporate profits and stock valuations.
Zhong notes that investors are now shifting focus from “reopening trade” to “monetary tightening risk.” The market is no longer just betting on growth—it’s worrying about whether growth will be sustainable under tighter financial conditions.
3. Strong Economic Data Reinforces Tight Policy
Recent economic indicators have only strengthened the Fed’s hand.
On January 10, the U.S. Labor Department reported:
- 256,000 nonfarm jobs added in December—well above the 160,000 forecast
- Unemployment rate fell to 4.1%, below expectations
- Hourly wages rose 0.3% month-on-month, in line with forecasts
A resilient labor market suggests the economy can withstand higher rates. With inflation still above target—CPI expected to rebound to 2.8% year-on-year, core CPI at 3.3%—the case for rate cuts weakens further.
Market pricing now reflects only one rate cut in 2025, down from two just weeks ago. Some analysts even warn of potential rate hikes if core PCE exceeds 3%.
Sector Rotation: From Cyclical to Defensive
The rotation within equities tells a clear story.
In November 2024, cyclical sectors led:
- Financials
- Industrials
- Energy
- Real Estate
By December, these same sectors were among the worst performers. The Russell 2000, a proxy for small-cap stocks, plunged 8.4%, far worse than the S&P 500’s 2.5% drop.
Conversely, technology, consumer discretionary, and communication services held up better—thanks in part to AI-driven earnings momentum.
Zhang Chi, Chief Analyst at Fangde Securities, explains:
“This isn’t just about Trump—it’s about valuations and fundamentals. Tech stocks are still growing earnings. But financials and industrials face headwinds from higher rates and slowing global trade.”
He forecasts the S&P 500 to gain 5–10% in 2025—but with high volatility. Investors should prepare for a bumpier ride than in recent years.
Bitcoin: From “Trump Trade” Darling to Regulatory Reality Check
Bitcoin was once seen as a direct beneficiary of Trump’s pro-crypto stance. His campaign pledges—to make the U.S. the “global crypto capital” and establish a “Bitcoin strategic reserve”—fueled speculation.
The market euphoria peaked on December 4, when Trump nominated Paul Atkins, a crypto-friendly regulator, to lead the SEC.
But reality set in quickly.
On December 18, Powell stated clearly: The Fed does not seek legal authority to hold Bitcoin. The message was unambiguous—central banks remain cautious about digital assets.
Bitcoin dropped sharply and has yet to reclaim $100,000.
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Still, long-term optimism remains. Trump’s administration could push for clearer crypto regulations, potentially unlocking institutional adoption.
Gold’s Resilience Amid Rising Real Yields
Gold, which initially fell on Trump’s win due to stronger dollar and bond yield expectations, has begun to recover.
However, its upside remains capped.
Higher real interest rates (nominal yields minus inflation) make non-yielding assets like gold less attractive. The stronger dollar adds further pressure.
That said, geopolitical uncertainty and fiscal risks could reignite safe-haven demand later in 2025.
Zhang expects gold to rise in the high single digits this year—but not match its 2024 performance.
What’s Next for the “Trump Trade”?
The first wave of “Trump trade” may be fading, but a second act could emerge once Trump takes office.
Zhong Zhengsheng outlines two possible scenarios:
📈 Scenario 1: “De-Inflation Trade”
If Trump prioritizes fiscal discipline, deregulation, and moderate tariffs:
- Stocks and bonds rise
- Dollar weakens
- Yields stabilize
📉 Scenario 2: “Stagflation Trade”
If aggressive tariffs and immigration crackdowns dominate:
- Stocks and bonds fall
- Dollar strengthens
- Gold and commodities rally
The key variable? Policy surprises.
Markets have already priced in a base case. Only unexpected moves—either more moderate or more radical—will reignite strong directional trades.
Zhang believes the next wave of gains will be narrower: focused on Musk-related stocks (Tesla, SpaceX) and Bitcoin. Broader market leadership will require more favorable macro conditions.
Frequently Asked Questions (FAQ)
Q: What is the "Trump trade"?
A: The "Trump trade" refers to market movements driven by expectations of pro-growth policies under Donald Trump—such as tax cuts, deregulation, higher deficits, and protectionist trade policies. It typically favors equities, cyclicals, and commodities while pressuring bonds and gold initially.
Q: Why are stocks falling despite Trump’s win?
A: Because rising Treasury yields and fears of prolonged high interest rates are offsetting optimism about fiscal stimulus. Higher borrowing costs threaten corporate profits, especially for rate-sensitive sectors.
Q: Is Bitcoin still tied to Trump’s policies?
A: Yes—Trump has expressed strong support for crypto innovation. However, regulatory clarity from agencies like the SEC and Fed will ultimately determine Bitcoin’s trajectory more than political rhetoric.
Q: Will gold benefit from Trump’s presidency?
A: Potentially—but not immediately. While political uncertainty supports gold, rising real yields and a strong dollar limit its upside. A shift toward stagflation could boost gold later in 2025.
Q: How might the Fed respond to Trump’s economic plans?
A: The Fed has emphasized independence. If Trump’s policies fuel inflation, the Fed may keep rates high or even hike—regardless of political pressure.
Q: What should investors do now?
A: Focus on quality and resilience. Consider defensive sectors like healthcare, limit exposure to overvalued tech stocks, and watch yield trends closely. Diversify into assets that perform well in volatile regimes.
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Final Outlook: A More Nuanced Market Ahead
The initial euphoria of the “Trump trade” has given way to a more complex reality. Markets are no longer simply reacting to election results—they’re assessing sustainability.
With higher yields, tighter monetary policy, and fiscal risks on the rise, investors must navigate a landscape where growth optimism is increasingly tempered by financial constraints.
The next phase of the “Trump trade” won’t be a repeat of 2016–2017. It will be more volatile, more selective—and more dependent on policy execution than ever before.
Core Keywords: Trump trade, U.S. stocks, Bitcoin, Treasury yields, gold, inflation risk, market volatility, Federal Reserve