(Bloomberg) — Wall Street traders know what to expect from Donald Trump’s White House return: policy shifts rolled out in late night social-media posts, threats to trading partners, and plenty of market volatility.
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What they’re less sure about? How to predictably gin up quick profits by seizing on it all.
Take last week. On Jan. 6, traders bid up S&P 500 futures and drove down the dollar after the Washington Post reported that Trump’s aides were considering rolling back his tariff plans. The opportunity, though, fizzled nearly as quickly as it emerged when Trump shot the story down just before the stock market’s open.
The next day, during a press conference at Mar-a-Lago, the President-elect did something more surprising. He floated the idea of using “economic force” to compel Canada into becoming a US state — a step that would upend the economic order and usually be expected to rattle investors. But currency traders effectively ignored it as a bluff, holding the Canadian dollar in a narrow range.
“I don’t know how you trade anything,” said Benson Durham, head of global asset allocation at Piper Sandler & Co., summing up the concern of many on Wall Street. “You can’t really plug Trump’s comments into a formal econometric model.”
That uncertainty has left bond and stock traders coalescing around a strategy they’ll deploy after Trump is sworn into a second term on Monday. Focus on the long-term economic impacts. Filter out the daily noise. And keep cash on hand to pounce if he sets off market movements that seem destined to be short-lived.
The result so far has left the focus on speculation that Trump will pour stimulus on an already strong economy by cutting taxes and rolling back regulations for favored industries.
That optimism lifted the stock market during the final months of last year, cinching the S&P 500’s best back-to-back annual gains since the late 1990s. But more recently, the advance has stalled as the same expectations pushed bond yields higher while traders ditched bets on any further interest-rate cuts from the Federal Reserve before the second half of the year.
Yet it’s still not certain what shape some of the positions Trump has already staked out — like raising tariffs or deporting those in the country illegally — will take. If done aggressively, they could send new shockwaves through markets. On top of that, there are wildcards like Trump’s interest in taking over Greenland or the Panama Canal.
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“We don’t know what executive orders will be announced on Monday afternoon or Tuesday morning, but they might be severe — or they might be completely inconsequential,” said Michael Purves, chief executive officer at Tallbacken Capital Advisors. “What we do know is we are now having our very first real taste of the Trump administration’s uncertainty dynamic.”
The question about the scale of Trump’s tariff plans has been a key source of that in the stock market.
Trading currencies has been more predictable, with higher bond yields elevating the US dollar and weighing on emerging-market currencies.
In the Treasury market, the yield curve has steadily steepened since the election as longer-dated yields climbed further above short-term ones. That signals expectations that economic growth will be strong in the years ahead, as well as concerns that the supply of bonds will keep growing on the back of a rising federal deficit.
For Cole Wilcox, portfolio manager at Longboard Asset Management, the approach has been to push into small- and mid-cap equities, as well as financial and industrial stocks. He has also increased his cash holdings to around 20% to free up money that can be deployed.
Overall, Wall Street entered the year optimistic about the stock market despite risks posed by geopolitical shifts in Washington and already heady valuations.
There’s been solid reason for the bullishness. The economy has surprised forecasters with its resilience, the post-pandemic inflation surge has receded, and corporate profits have continued to grow. Moreover, Trump has consistently seen a rising stock market as a key bellwether of his success, so it’s likely to be a priority.
“It is really important to stay invested even in the face of uncertainty,” said Kristy Akullian, BlackRock Inc.’s head of iShares investment strategy. “The US economy is growing, corporate profits are strong, and we are pro-risk, overweight equities and overweight US.”
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