[Financial Planning for the 100-Year Life] The Reversal of the Trump Trade

There was an expectation that if Donald Trump became the President of the United States, tariffs would cause prices and interest rates to rise, and the dollar index would also increase. In fact, there was such a 'Trump trade' in the financial markets. The yield on the U.S. 10-year Treasury note, which was 3.61% in mid-September last year, surged to 4.79% on January 14 this year. The dollar index also rose from 100 to 110 during the same period.

However, since then, market interest rates have fallen, and especially the dollar index has dropped significantly. The reason is the possibility of a recession in the U.S. economy. Some cautiously diagnose that the U.S. economy may fall into 'stagflation.' Data released in February by the University of Michigan and the Conference Board show that consumer sentiment has worsened and expected inflation has risen sharply.

The probability of the U.S. economy entering a recession in the first half of this year is high because consumption is expected to decline. Consumption accounted for as much as 68.9% of the U.S. Gross Domestic Product (GDP) last year. Over the past two years, consumption increased, leading to a high growth rate of around 2.9% in the U.S. economy. However, in January this year, personal consumption expenditures decreased by 0.2% compared to the previous month. Durable goods consumption dropped by 3.0%, and semi-durable goods spending also decreased by 0.2%. When the economy is expected to worsen, households first reduce consumption of durable goods such as automobiles and home appliances, followed by a reduction in semi-durable goods consumption such as clothing and shoes.

Although service expenditures, which account for 69% of consumption spending, are increasing, this also depends on employment conditions. In February, nonfarm payroll employment in the U.S. increased by 151,000, but the pace of increase slowed, and the unemployment rate rose moderately to 4.1%. U.S. employment is extremely flexible. When consumption sharply declined due to COVID-19 in early 2020, U.S. companies cut 21.87 million jobs in March and April of that year. This means that jobs that had increased for nearly 10 years disappeared in just two months.

If consumption decreases, corporate sales and profits will decline, and companies will flexibly reduce employment. This phenomenon is likely to appear as early as April. Employment reduction will again lead to a decrease in household income and consumption, deepening the recession in the U.S. economy. The 'GDPNow' model of the Federal Reserve Bank of Atlanta, known as a real-time barometer of the U.S. economy, forecasted on the 6th that the GDP growth rate for the first quarter of this year (annualized) would be minus (-) 2.4%. In the second quarter, consumption and employment are expected to decline further, increasing the depth of the recession.

This outlook for the U.S. economy will manifest in the financial markets in the following ways. First, the downward trend in market interest rates is expected to continue. The 10-year Treasury yield fell from 4.79% in mid-January to around 4.2% in early March and is expected to decline further. The Federal Reserve is expected to maintain the federal funds rate at 4.25?4.50% at the March Federal Open Market Committee (FOMC) meeting but is anticipated to start cutting rates from the May FOMC, with total cuts reaching 1 percentage point by the end of this year. If so, the 10-year Treasury yield is likely to fall to around 3.6%. This suggests that buying some U.S. bonds is acceptable. However, since the dollar index will also fall with the interest rate decline, expected currency losses in U.S. bond investments should be considered.

Major U.S. stock indices have been declining this year. If the economy falls into a recession, corporate earnings will decrease, and the stock price decline could deepen. It is difficult to view the U.S. stock market optimistically even in the long term. Over the past 10 years, the S&P 500's average annual return was 12.1%, during which the stock index entered an overvalued range compared to nominal GDP and corporate earnings. From 2000 to 2010, the S&P 500's average annual return was 1.0%. The possibility of returning to that period cannot be ruled out. Investing unilaterally in U.S. stocks based solely on the past 10 years' performance is risky. When the dollar index falls, emerging market stock indices, including Korea, have risen more. Adjusting country weightings will be necessary.

Kim Young-ik, Adjunct Professor, Graduate School of Economics, Sogang University

This content was produced with the assistance of AI translation services.