What triggered the US stock market adjustment in the "Trump Trade"?

The previous report deduced Trump's policies and asset prices in the short term, while this article focuses on long-term logic. In addition to referencing Agenda47 and public speeches related to Trump's policies, this article supplements five perspectives: 1) Project 2025; 2) 2024 GOP Platform; 3) Bloomberg Businessweek's interview with Trump; 4) JD Vance's policy tendencies; 5) The capital forces represented by Trump. So, why did the U.S. stocks and commodities adjust successively at the moment when the Federal Reserve signaled a rate cut in September and Trump is expected to secure victory early?

Perspective One, Project 2025: Undercurrents of fundamental institutional restructuring. Project 2025 is a series of conservative and establishment policy proposals put forward by a far-right American think tank. The plan consists of four main pillars: policy planning, personnel database, online training, and a 180-day post-employment operational guide. Our understanding of this plan is that Trump's policies in the previous term often defied conventional wisdom and sparked internal party disputes. Therefore, conservatives have three core demands: party unity to win elections, institutionalizing policies to reduce risks, and concentrating power towards federal government control during the four-year term.

Perspective Two, GOP Platform: A comprehensive return to "common sense". 1) Economic policies: "Anti-inflation", "tax cuts", and "innovation assistance". Trump's core demand is to counter potential inflationary pressures by rapidly releasing energy supplies. The platform implies a gradual implementation of tax reduction policies, following the pace of tariff increases, with future economic development focusing on three emerging industries: digital currency, artificial intelligence, and aerospace. 2) Foreign policy: Opposing illegal immigration, strengthening military power to compete with non-U.S. entities. The platform upholds Trump's "America First" principle, takes a tough stance on illegal immigration, and seeks to reduce systemic geopolitical risks through military means. 3) Industrial policy: Returning to traditional energy sources, vigorously developing domestic manufacturing, and optimizing the allocation of education and healthcare resources. In terms of energy, the GOP supports the vigorous release of domestic traditional energy sources; in the industrial sector, the platform emphasizes strong support for manufacturing and job protection; in education, the GOP encourages a "right-leaning" ideology and optimization of the education system; in healthcare, the GOP focuses on the financial stability and sustainability of the healthcare system.

Perspective Three, Bloomberg Businessweek Interview: Trump's self-consistent policy logic. The energy revolution reduces inflation, gradual implementation of tariffs and tax cuts achieves mild fiscal expansion, anti-immigration policies protect local workers' jobs, and complementary policies and funding achieve localization of manufacturing. Considering the governance situation in the previous term, there is a high probability of Trump "walking the talk", and rule constraints can be partially relinquished to commercial interests.

Perspective Four, JD Vance: Positioned as an "executor" rather than a "supervisor". In terms of economic policies, Vance advocates for mostly "deregulation" + "tax cuts" bills, while strongly supporting tariff increases; in foreign policy, Vance's tendencies are permeated with the "America First" principle and a strong unilateralist color; in industrial policy, Vance supports "returning to traditional energy" + "vigorously developing manufacturing" We believe that if Trump wins, Vance is more likely to play the role of "executor or spokesperson" rather than "supervisor or moderate".

Perspective Five, Two Realities Reflected by Trump's Campaign Capital: Financial deregulation and the return of traditional industries. Unlike the previous round where Trump "dug into his own pocket", this time Trump has many supporters. From the distribution of industries, "financial deregulation" and "return of traditional industries" are two major themes.

During the "Trump 1.0" phase (2017-2020), the U.S. stock and bond markets were bullish, with the technology and healthcare sectors consistently outperforming. Why is it that as "Trump 2.0" approaches, the U.S. stock market and even commodities are collectively adjusting? 1) The coherence of Trump's policies stems from "dislocation", but the uncertainty in policy implementation still remains high, making the "Trump agenda" seem contradictory, with increasing domestic policy uncertainty in the next four years in the U.S.; 2) The political cycle pattern of the U.S. stock market indicates that if Trump is re-elected, there will be an annual-level adjustment in the U.S. stock market in 2025-2026, as overseas investors seek to profit after repeated record highs; 3) As mentioned in the report "Will the Fed Cut Interest Rates This Year?", with the significantly reduced likelihood of Biden's re-election, the probability of an early interest rate cut has increased, but a rate cut implies confirming economic slowdown, which may instead help to lower the already very high valuations of U.S. stocks.

The main text is as follows:

I. Project 2025: The Undercurrent of Bottom-up Institutional Restructuring

Project 2025 is a series of conservative and establishment policy proposals put forward by the American far-right think tank Traditional Foundation [1]. The plan consists of four pillars: policy planning, personnel database, online training, and a 180-day post-employment operational guide. The plan proposes to centralize the power to appoint and dismiss federal employees, implement partisan control over departments such as the Department of Justice, FBI, and Department of Commerce, abolish the Department of Homeland Security and Department of Education, and meticulously formulate detailed implementation plans for issues such as the economy, immigration, healthcare, education, military, and climate. Of course, there are still unknowns about the implementation of this plan, but what is relatively certain is that the Republican Party is trying to achieve a balance internally. Our understanding of this plan is that during the previous term, Trump's policies often went against conventional wisdom and sparked internal disputes, so conservatives have three core demands: first, to win the election through internal unity; second, to institutionalize policies to reduce risks; and third, to concentrate power in the federal government to control the situation during the four-year term. Although Trump denies any connection to Project 2025, a considerable number of participants are linked to Trump's campaign activities.

II. Republican Governance Agenda: A Comprehensive Return to "Common Sense"

The opening of the Republican governance agenda is highlighted by "America First: A Return to Common Sense", with the deep meaning behind "common sense" calling for a return to traditional values in America. In the preface, "common sense" is mentioned five times: 1) solving immigration issues and ensuring border security; 2) controlling inflation and promoting manufacturing employment; 3) restoring energy supply and achieving energy independence; 4) building a strong military; 5) ensuring judicial security [2]. The agenda also presents 20 commitments and elaborates on them in 10 chapters, which we summarize into three aspects: economic, foreign, and industrial policies （一）Economic Policies: "Anti-inflation", "Tax Reduction", and "Supporting Innovation"

The theme of Chapter 1 of the manifesto is "Overcoming inflation and rapidly reducing prices", conveying two messages: first, past high inflation was caused by the Biden administration; second, Trump has a strong willingness and capability to reduce inflation. Trump is well aware that his three major policy proposals of "imposing tariffs + reducing income taxes + anti-immigration" will push inflation upwards in the medium term, but he hopes to quickly release potential inflation risks through energy supply, "releasing all energy production including nuclear energy", and "lowering energy prices to even below the historical lowest levels of Trump's first term". We believe this is a key part of Trump's fight against inflation during his term, while other measures such as "reducing household and business regulatory costs", "controlling wasteful federal spending", and "lowering geopolitical risks" are just icing on the cake rather than a lifesaver.

The intensity and pace of tax cuts may be later than the previous round. The manifesto proposes to "permanently implement the 'Tax Cuts and Jobs Act' that doubles the standard deduction, expands child tax credits, cancels tip taxes for millions of restaurant and hotel workers, and seeks further tax cuts". Due to subsequent high tariffs, the manifesto points out that "as tariffs on foreign producers rise, taxes for American workers, households, and businesses may decrease", implying that the implementation of tax cuts is more likely to be gradual.

The future economic development will focus on three emerging industries: digital currency, artificial intelligence, and aerospace. Regarding digital currency, the manifesto advocates for "reducing government crackdown on cryptocurrencies, defending the right to mine Bitcoin, and opposing the creation of central bank digital currencies"; in terms of artificial intelligence, the manifesto "supports the development of artificial intelligence based on freedom of speech and human prosperity, and cancels dangerous executive orders from the Democratic Party that hinder artificial intelligence innovation"; in the aerospace sector, the Republican Party supports "government cooperation with commercial space exploration, enhancing the ability to access, inhabit, and develop space assets".

（二）Foreign Policy: Opposing Illegal Immigration, Strengthening Military Power to Counter Non-Americans

The manifesto adheres to Trump's "America First" principle, taking a tough stance on illegal immigration and reducing systemic geopolitical risks through military means.

Regarding immigration issues, the manifesto clearly states "restore all border policies of the Trump administration and complete the construction of the border wall" to fulfill unfinished business from the previous term. At the same time, the manifesto aims to control the "quality" and "quantity" of immigrants, advocating to "prioritize immigrants who can contribute to the American economy and society" by raising the threshold for legal immigrants, while also "stopping providing luxury housing and taxpayer benefits to illegal immigrants" and "cutting federal funding to sanctuary jurisdictions", ensuring that illegal immigrants are "deported back to their countries" rather than "arrested and released".

Regarding the Russia-Ukraine issue, according to recent remarks by Hungarian Prime Minister Orban, if Trump wins the election, he will "promptly request Russia to negotiate peace with Ukraine and has formulated a 'meticulous plan' for this", combined with the manifesto's mention of "ending global chaos", we believe Trump may resolve the Russia-Ukraine issue through negotiations with Putin and cutting aid to Ukraine Regarding the Israeli-Palestinian issue, the Republican Party still considers Israel as an important ally in the Middle East. The platform proposes "supporting Israel and seeking peace in the Middle East." Therefore, it is highly probable that Trump will maintain support for Israel after taking office, thereby strengthening America's influence in the Middle East.

(III) Industrial Policy: Returning to traditional energy, vigorously developing domestic manufacturing, optimizing the allocation of education and medical resources

In terms of energy, the Republican Party supports vigorously unleashing domestic traditional energy supplies to ensure energy independence. The platform proposes to "comprehensively increase energy production, simplify licensing procedures, and end restrictions on oil, natural gas, and coal."

In the industrial sector, the platform emphasizes strong support for manufacturing and job protection. Continuing the train of thought from the previous term, the Republican Party proposes the return of "key supply chains," creating more jobs for domestic workers through supporting the "localization" of manufacturing, and correspondingly raising wage levels. At the same time, the Republican Party proposes revitalizing "critical defense industries" and the "American automotive industry," and driving the development of related industries through investing in the construction of the "Iron Dome Missile Defense Shield."

In education, the Republican Party encourages an "ideologically right-leaning" stance and optimization of the education system. It advocates for "promoting fair and patriotic citizen education" and "supporting schools that teach American founding principles and Western civilization" to reduce left-wing propaganda and inappropriate political indoctrination of students. Additionally, the Republican Party hopes to introduce "more affordable alternative programs to traditional four-year college degrees" and expand 529 account subsidies for family education to ensure the universality of education. Furthermore, the Republican Party emphasizes the "localization" and "fairness" of education, proposing to return education system management to the states, return education rights to parents, and "end teacher tenure" to prevent the centralization of educational power, thereby deepening overall reform of the education system.

In healthcare, similar to the political proposals put forward by the Trump Agenda47, the Republican Party platform focuses on the financial stability and sustainability of the healthcare system. The platform promises "not to cut Medicare or Social Security funding," while using a more market-oriented approach to "reduce drug and treatment costs" to ensure patients can afford treatment. Additionally, the Republican Party advocates for avoiding including illegal immigrants in the health insurance list to further alleviate the overall burden on the social security system.

III. Bloomberg Businessweek Interview: Trump's Coherent Policy Logic

On June 25th, Trump was interviewed by Bloomberg, and we believe the incremental information mainly includes:

1) Regarding economic policy, Trump "emphasizes solving inflation issues by increasing energy production," will not "dismiss Powell before the end of his term," and suggests "avoiding rate cuts before November." Trump also emphasizes that "Trumponomics = low interest rates + low tax rates, using tariffs and other economic means to encourage companies to return to the United States." "Ensure the competitiveness and independence of the United States in the global economy."

2) On diplomatic policy, Trump emphasized that "Saudi Arabia needs the protection of the United States" and that "high oil prices are one of the main reasons for Russia's wars."

3) Regarding industrial policy, Trump stressed the need to "balance traditional energy and new energy," believing that "there should be some regulation of large American technology companies, but at the same time, he hopes that American technology companies can continue to grow and maintain global competitiveness."

Combining with the Republican Party's governing agenda, Trump's policy logic is self-consistent: the energy revolution reduces inflation, foreign tariffs and internal tax cuts gradually achieve fiscal moderate expansion, anti-immigration and protection of local workers' employment, supporting policies and funding achieve manufacturing localization. Considering the governance situation in the previous term, Trump's likelihood of "doing what he says" is relatively high, and rule constraints to some extent can be relinquished to commercial interests.

IV. JD Vance: Positioning as an "Executor" rather than a "Supervisor"

On July 15th, after Trump was elected as the Republican presidential candidate, he announced the selection of Ohio Senator James David Vance (J.D. Vance) as his running mate, the vice presidential candidate[6].

Vance's policy proposals are highly consistent with Trump's, and in some aspects, even more radical than Trump. According to data from the U.S. Congress[7], after being elected as a federal senator for Ohio in 2022, Vance participated in a total of 345 legislative initiatives/co-sponsored legislation activities in Congress. Due to his relatively short tenure, most of Vance's bills remained at the proposal stage, focusing more on expressing positions rather than actually implementing policies. We found that Vance's thoughts on economic, foreign, and industrial policies are close to Trump's, and some policies are more direct and explicit than the Republican Party's governing agenda.

In terms of economic policy, most of the bills Vance advocates for are "deregulation" + "tax cuts", while strongly supporting tariffs. Regarding regulation, Vance advocates for banning the central bank from issuing "digital currency" to prevent personal funds from being officially tracked, and by limiting the disclosure requirements and scope of government regulatory agencies for insurance companies and financial institutions, he largely maintains the independence of market institutions. In terms of taxation, Vance continues the conservative style of the Republican Party, advocating for the permanent reduction of taxes on certain business income and seeking a broader range of tax deductions. It is evident that Vance's policy proposals in the economic field align closely with Trump's On foreign policy, WanSi's inclination fully permeates the principle of "America First," with a strong unilateralist color. On the issue of immigration, WanSi hopes to "initiate deportation procedures" and "prevent sanctuary cities from receiving federal housing funds," which is consistent with Trump's call to stop "arrest and release" and aims to fundamentally reduce the number of illegal immigrants domestically. Just as Trump mentioned in his campaign agenda Agenda47 about "criminalizing administrative violations of illegal immigrants," WanSi demands the Department of Homeland Security to detain non-American nationals arrested for "burglary, theft, or shoplifting."

On foreign issues, WanSi clearly demonstrates a stance more in line with "American interests," showing less concern for the Russia-Ukraine issue and strong support for Israel. WanSi once said, "Israel has an achievable goal, Ukraine does not," while defending Israel's wartime policies. Compared to the governing agenda's expression of "seeking peace," WanSi's support appears more radical.

In terms of industrial policy, WanSi supports "returning to traditional energy" + "vigorously developing manufacturing." WanSi opposes "restrictions on natural gas-related equipment" and "arbitrary bans on large energy or mineral leasing or permits," and seeks to slow down the "greening" of the energy structure. At the same time, WanSi has expressed that he "does not consider climate change a threat," which aligns with the logic behind Trump's withdrawal from the Paris Climate Agreement. WanSi emphasizes protecting domestic manufacturing and hopes to introduce bills such as the "American Auto Workers Priority Act" to encourage the reshoring of the entire industrial chain, including restricting offshore outsourcing of vehicle assembly operations and promoting the use of American parts and labor in the automotive industry to boost the U.S. auto industry and improve the treatment of American blue-collar workers.

For a long time, the influence of the U.S. Vice President on U.S. policy has not been clearly quantified, but considering his relatively short time in politics and high degree of consistency with Trump's ideas, we believe that if Trump wins, WanSi is more likely to play the role of "executor or spokesperson" rather than "supervisor or moderate," and may express more radical views on sensitive issues to test opposing opinions on behalf of Trump.

V. Two Realities Reflected by Trump's Campaign Capital: Financial Deregulation and Return of Traditional Industries

In theory, the campaign funds of specific industries often reflect the inclination of industrial policy support, and we can also infer Trump's policy preferences from the industry distribution of campaign funds. According to data released by Open Secrets as of June 21, in this round of the campaign, Trump's campaign committee has raised approximately $196 million. Different from the previous round of Trump's "self-financing", this time Trump has many supporters. Data shows that in this election campaign, large donations dominate, exceeding $130 million. At the same time, small donations of $200 or less are also considerable, proving that Trump still has grassroots support, especially from the working class. Trump's "donors" are different from ordinary donors, their support is similar to "votes", representing market expectations and implicit bets on policy favors being realized, reflecting the donors' approval of Trump's policy proposals.

From the perspective of industry distribution, "financial deregulation" and "return of traditional industries" are two major themes. The securities and investment industry has the highest proportion of funding sources, echoing the "relaxation of financial regulation" in the governing agenda, and the reduction of compliance costs will inevitably enhance the industry's overall profitability. The trend of the return of traditional industries is evident, as Trump has clearly realigned towards traditional energy and has repeatedly proposed to seek "maximization of fossil fuel production", naturally gaining support from the oil and gas industry as well as the aviation transportation industry. Additionally, Trump's proposed tax reforms and reduction of operating costs in the real estate industry have also received support from real estate developers.

Chapter Six: "Trump 2.0 Deal", How Will the U.S. Stock Market and Commodities Adjust?

From 2017 to 2020, during Trump's term, the U.S. stock market performed well due to demand improvement, U.S. bonds first fell and then rose under the influence of the Federal Reserve's policies, the U.S. dollar index first fell, then rose, and then fell again, overall ending lower, gold performed well, while oil was weak, and the technology and healthcare sectors consistently delivered excess returns.

Trump's tax reforms and loose fiscal policies significantly boosted domestic demand, while optimizing corporate cost structures through regulatory relaxation further enhanced corporate profitability. From 2017 to 2020, the S&P 500, Dow Jones, and NASDAQ achieved growth rates of 67.77%, 54.87%, and 139.42% respectively, with the technology and healthcare sectors consistently delivering excess returns. In 2017, after Trump took office, the expectations of tax cuts, regulatory relaxation, and strengthened infrastructure policies greatly boosted market confidence; in 2018, concerns about U.S.-China trade tensions and Fed rate hikes intensified market worries about liquidity tightening, leading to a convergence in stock market gains; In 2019, the Federal Reserve cut interest rates, the impact of Trump's "Tax Cuts and Jobs Act" continued, driving strong economic growth; in 2020, to alleviate the impact of the epidemic on the economy, the Federal Reserve restarted "zero interest rates + quantitative easing", coupled with Trump's large-scale fiscal stimulus, leading to a sharp rise in US stocks.

As we are about to enter the "Trump 2.0" phase, why are US stocks and commodities undergoing comprehensive adjustments?

We believe there are three reasons. Firstly, the self-consistency of Trump's policies stems from "dislocation", but the pace of policy implementation still has great uncertainty, making the "Trump agenda" appear contradictory, and the domestic uncertainty in the United States over the next four years is increasing. For example, among the 20 commitments in the Republican Party's 2024 governing agenda, there are mentions of "stopping outsourcing and turning the United States into a manufacturing superpower" and "maintaining the US dollar as the world's reserve currency." Obviously, the status of the US dollar as the world's reserve currency is based on the positioning of the United States as a consumer country. Once the United States shifts to manufacturing, the status of its reserve currency will likely be weakened, unless there is a sequential relationship between the two, first bringing manufacturing back to the United States, and then re-shifting outward.

Secondly, the political cycle pattern of US stocks predicts that if Trump is re-elected, there will be annual-level adjustments in US stocks in 2025-2026, after repeatedly hitting new highs, overseas investors will try to take profits. In several reports such as "Has the Adjustment of US Stocks Ended?" (April 24, 2024), we pointed out that there are three political cycle patterns in US stocks: 1) in election years seeking re-election, US stocks will rise, even significantly; 2) during the stable period of a US president's term, namely: the 3rd and 4th years of the first term and the 1st and 2nd years of the second term (if re-elected), US stocks also perform very steadily, without annual-level adjustments; 3) years of US stock declines are concentrated in the first two years of each president's term, and the reason why US stocks did not fall in the first two years of Obama's term is mainly because the US stock market had already plummeted in 2008. Looking at the present, US stocks have repeatedly hit new highs this year, and overseas investors already have the desire to take profits before the election; coupled with the potential re-election of Trump, based on the third political cycle pattern, US stocks may experience at least one year of significant decline in 2025-2026 Finally, a rate cut is equivalent to confirming an economic slowdown.

As stated in the report "Will the Fed Cut Rates This Year?", we have been emphasizing before June that there will be no rate cut before the election, mainly because a rate cut is easy to trigger secondary inflation expectations, which is not conducive to Biden's election prospects. Now that Biden's chances of re-election have significantly decreased, he needs to weigh the pros and cons of a rate cut from the perspective of party interests. From a fundamental perspective, the real interest rates in the United States are significantly higher than 1%, and with various indicators gradually weakening, it is reasonable whether to cut rates or not. From the perspective of the two-party game, Trump's three major propositions "imposing tariffs, reducing income taxes, and opposing immigration" all contribute to inflation. Therefore, if a rate cut is made ahead of schedule this year, it may hinder the implementation of the above policies by the Republican Party in the future. If the data in August and September continues the current weak trend, the FOMC in September is expected to implement a rate cut. However, a rate cut is equivalent to confirming the slowdown of the U.S. economy, which means curbing the momentum of U.S. stocks. The current high valuation of U.S. stocks cannot be simply digested by a rate cut. Instead, a rate cut will increase the pressure for U.S. stock adjustments.

References:

[1] https://www.project2025.org/

[2] https://prod-static.gop.com/media/RNC2024-Platform.pdf

[3] https://www.ft.com/content/44493fa9-d8f2-4407-94ac-a072c1976ca2

[4] https://www.donaldjtrump.com/agenda47

[5] https://www.bloomberg.com/features/2024-trump-interview-transcript/

[6] https://www.nbcnews.com/politics/2024-election/trump-vice-president-running-mate-pick-jd-vance-rcna157485

[7] https://www.congress.gov/member/j-vance/V000137 [8] https://www.nytimes.com/2024/07/15/us/politics/jd-vance-abortion-immigration-issues.html Author: Zhang Jingjing (S1090522050003), Wang Lebin (S1090523070007), Source: Jingguan Finance, Original Title: "What triggered the US stock adjustment of the 'Trump Trade'?"