Trump Trade Stocks Slump Amid Inflation and Geopolitical Risks

The investment strategy known as the 'Trump Trade,' which sought to capitalize on former President Donald Trump's economic policies, has experienced a significant downturn, losing approximately 16% since May. This index, compiled by Ned Davis Research, tracks a dozen exchange-traded funds (ETFs) anticipated to benefit from policies related to homebuilding, defense spending, and manufacturing reshoring. While the strategy initially outperformed the S&P 500 Index earlier in the year, several ETFs within the index are now trading lower year-to-date.

Ned Davis Research attributes the decline primarily to the geopolitical conflict with Iran, which has led to increased energy prices, inflation expectations, interest rates, and a stronger US dollar. Pat Tschosik, chief thematic strategist at Ned Davis Research, highlighted the persistent inflationary shocks stemming from tariffs, wars, and supply chain disruptions as key factors. He expressed a desire for a three-month period free from such economic shocks.

The reversal follows a period of strong performance for Trump Trade bets, with many posting double-digit percentage gains in the first quarter. ETFs such as the VanEck Rare Earth and Strategic Metals ETF, the Global X Uranium ETF, and the Global X Defense Tech ETF had all seen gains of at least 20% at certain points in the first quarter. These gains were partially maintained into the second quarter before ultimately turning negative.

According to Matt Gertken, chief geopolitical strategist at BCA Research Inc., investors backing Trump's agenda have faced multiple setbacks this year. These include the negative economic repercussions of the Iran conflict, such as higher inflation that has hindered manufacturing and housing investments. Additionally, the strong performance of AI-focused investment themes has overshadowed the gains in specific stocks previously favored by the Trump Trade strategy.