Trump’s Second Term Sparks Market Volatility as Initial Optimism Fades

Markets Reassess ‘Trump Trades’ One Month Into Second Term

One month into President Donald Trump’s second term, the post-election market euphoria has started to fade. Investors initially piled into risk assets, driving up stocks, the U.S. dollar, and Bitcoin, anticipating that Trump’s policies would fuel economic expansion. However, as the administration shifts focus toward tariff threats and protectionist measures, investor sentiment has turned more cautious, leading to pullbacks across major asset classes.

The Early Rally and Its Reversal

Following the November 5 election, global markets witnessed a surge in optimism. Stocks, cryptocurrencies, and U.S. Treasuries rallied sharply on expectations that Trump’s deregulation, tax cuts, and protectionist trade policies would boost growth and inflation.

However, the enthusiasm has begun to wane as Trump’s tariff threats escalate, particularly in the automotive, semiconductor, and pharmaceutical industries. Investors now fear that increased trade barriers could lead to higher inflation and slower economic growth, limiting the Federal Reserve’s ability to cut interest rates.

“There was an overshooting of rampant optimism without investors really thinking it through,” said Eric Diton, President of Wealth Alliance.

Key Market Movements Since Trump’s Re-Election

1. Small-Cap Stocks Lose Momentum
   • Initially, small-cap stocks surged on expectations that Trump’s America-first policies would protect domestic businesses.
   • The Russell 2000 Index jumped 5.8% the day after the election, marking its biggest one-day gain in three years.
   • However, by mid-February, the rally stalled, and the index is now only 1% higher than its pre-election level.
2. S&P 500 Lags Global Markets
   • The S&P 500 Index hit record highs post-election but has underperformed global benchmarks, including European, Chinese, and Mexican stocks.
   • Investor concerns over rising trade tensions and slowing corporate earnings growth have contributed to the index’s muted performance.
3. U.S. Dollar Strength Wavers
   • The U.S. dollar initially strengthened, as investors expected higher interest rates driven by pro-business policies.
   • However, as tariff risks mount and economic uncertainty rises, the dollar’s rally has lost steam.
4. Bitcoin and Cryptocurrencies Retreat
   • Bitcoin (BTC) and other cryptocurrencies surged in late 2024, fueled by expectations of favorable regulatory conditions under Trump.
   • BTC hit a record high of $109,000 in January, but has since struggled to maintain momentum, dropping back to the $93,000 range.
   • Analysts from CryptoQuant warn that weakening demand and declining liquidity inflows could push BTC down to $86,000.
5. Treasury Yields Face Mixed Signals
   • Investors initially shorted U.S. Treasuries, expecting higher growth and inflation.
   • However, as inflation fears mount and rate cut expectations shift, bearish bets on U.S. bonds have started to unwind.

What’s Driving Market Uncertainty?

• Tariff Threats:
  • Trump has signaled potential 25% tariffs on auto, semiconductor, and pharmaceutical imports, raising concerns over global supply chains.
  • Markets worry that higher costs could fuel inflation, limiting the Fed’s ability to ease monetary policy.
• Slowing Liquidity Inflows:
  • Crypto markets, which benefited from strong inflows in late 2024, are seeing reduced institutional interest.
  • Bitcoin ETF flows have turned negative, with outflows accelerating in February.
• Declining Blockchain Activity:
  • CryptoQuant data shows that Bitcoin’s network activity has hit its lowest level in a year, reflecting lower investor engagement.

What’s Next for Investors?

Despite the early optimism post-election, investors are now recalibrating their expectations. The key factors shaping market direction in Trump’s second term will be:

1. Clarity on Trade Policy:
   • If the administration softens its stance on tariffs, markets could regain confidence.
   • However, further trade escalations could lead to market volatility and risk-off sentiment.
2. Federal Reserve’s Response:
   • The Fed is expected to cut interest rates in 2025, but persistent inflation due to tariffs may delay rate cuts.
3. Corporate Earnings and Economic Growth:
   • Companies with high international exposure may face profitability pressures if tariffs are enacted.
   • Investors will closely watch earnings reports for guidance on how firms are navigating policy uncertainty.

Final Thoughts

While Trump’s re-election initially fueled risk-on sentiment, market realities have shifted. As tariff concerns, liquidity constraints, and economic uncertainty grow, investors must carefully assess their portfolio exposure.

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