[Financial Planning for the 100-Year Life] How Long Will the Trump Trade Last?

The U.S. stock market, interest rates, and the dollar index have all been rising simultaneously around the time of Donald Trump's presidential election victory. In addition, Bitcoin prices have surged. This phenomenon is known as the "Trump Trade." However, considering the economic conditions in the U.S., the sustainability of the Trump Trade appears limited.

Major U.S. stock indices, including the S&P 500, are reaching all-time highs. The primary reason for the stock price increase is Trump's tax cut policies. Trump pledged during his campaign to reduce corporate taxes and the highest personal income tax rates. This is expected to boost corporate investment and household consumption, leading to economic recovery and increased corporate profits, which in turn drives stock prices higher.

Despite the Federal Reserve lowering the benchmark interest rate since last September, market interest rates have been rising. The yield on 10-year Treasury bonds surged to 4.43% after Trump's election was confirmed. The main reason for rising market interest rates is the anticipated inflation caused by tariff increases. The first letter "T" in Trump's name is likened to "Tariff."

In an interview with The Wall Street Journal last month, he borrowed a verse from the New Testament's First Corinthians, saying, "Tariffs are, aside from faith and love, the most beautiful words I can think of." Trump declared in his election pledge that he would impose tariffs of up to 20% on all imported goods entering the U.S. and up to 60% on Chinese products. This would lead to higher U.S. inflation and could cause the Federal Reserve to halt interest rate cuts.

Along with rising stock prices and interest rates, the value of the dollar is also increasing. The rise in U.S. stock prices is attracting global equity investment funds to the U.S. Additionally, the increase in U.S. market interest rates is contributing to the dollar's strength.

Moreover, Bitcoin prices are soaring. Trump's statement about making Bitcoin a "strategic asset" is the biggest factor driving the coin's price surge.

In summary, all asset prices are rising due to the Trump Trade.

However, there appears to be a significant bubble in the stock market. The Shiller price-to-earnings ratio (PER) recently exceeded 38, far above the long-term average of 17.2 since 1880. The S&P 500 dividend yield is 1.2%, also much lower than the long-term average of 4.2%. Considering the 10-year Treasury yield is about 4.4%, the incentive to invest in stocks is diminishing. Even estimating with the U.S. nominal GDP, expected at 6.0% this year, the S&P 500 is overvalued by more than 20%.

Some economic indicators are signaling a recession next year. After the inversion of the yield curve, the U.S. economy has historically entered a recession. The 12-month moving average of the unemployment rate rose before a lagged recession occurred. The yield curve has inverted, and unemployment is rising. Additionally, the consumption cycle, which accounts for 69% of U.S. GDP, is weakening. In this case, both economic growth rates and inflation rates that determine market interest rates could decline simultaneously.

If the overvalued stock prices adjust downward and market interest rates fall, the dollar index is also likely to drop. The U.S.'s internal and external imbalances have expanded too much to sustain dollar strength. In the second quarter of this year, the U.S. net external debt reached a record high of $22.5191 trillion. Although this debt is supported by foreign direct investment and securities inflows, any reduction in these could cause the dollar index to fall. Furthermore, government debt relative to GDP was very high at 120.0% in the second quarter.

Although Trump has stated his intention to make Bitcoin a strategic asset, no concrete plans exist. Bitcoin cannot replace the dollar as a medium of exchange, which is an essential function of money. Its high price volatility also limits its role as a store of value. Bitcoin may continue to serve as an investment vehicle. However, the recent price surge is excessive. While the timing is uncertain, the direction of the "Trump Trade" could change abruptly in the near future.