Donald Trump Trade Chaos: Citi Warns of Shocking Market Shifts Under New Administration

Following Donald Trump’s return to the White House, Citi strategists have outlined the anticipated market shifts in what they call the "Trump trades," segmented into four distinct phases. From sentiment-driven optimism to controversial tariffs, Citi's analysis sheds light on potential winners, losers, and unpredictable ripple effects.

Phase 1: The Sentiment Surge

Citi identifies the first phase as the "pure sentiment trade," fueled by post-election optimism and the absence of Harris-led corporate tax hikes. The report predicts a year-end rally for U.S. equities, buoyed by seasonal market strength in November and December.

Strategists recommend staying long on U.S. indices, expecting sustained gains as investor confidence builds around the promise of corporate tax cuts. However, while the tone remains bullish, analysts caution that sentiment may outpace the actual policy impact.

Phase 2: Deregulation as a Market Catalyst

The second sequence highlights deregulation, an area where the Trump administration is expected to make swift moves without requiring Congressional approval. Key targets include energy, mergers and acquisitions regulation, and cryptocurrency policies. Citi expects these actions to further bolster market sentiment.

However, the report tempers expectations, noting limited historical evidence of significant small-cap outperformance tied to deregulation. This phase, while potentially transformative, may not deliver the sweeping gains some investors anticipate.

Phase 3: Immigration Policy's Market Impact

Immigration policies take center stage in the third phase, marked by stricter border controls and large-scale deportations. With appointments like South Dakota Governor Kristi Noem and former ICE Director Tom Homan, the administration signals an aggressive stance.

Citi strategists note that immigration has historically exerted a deflationary effect by increasing labor supply, offsetting inflationary demand pressures. However, the scale of proposed deportations could introduce unprecedented market variables. For now, analysts advise caution, steering clear of trades directly tied to immigration policies due to their uncertain outcomes.

Phase 4: The Tariff Tango

Tariffs, a hallmark of Trump’s first term, reemerge as a defining feature of the fourth phase. Citi expects an accelerated timeline for narrow tariffs targeting China, potentially impacting markets as early as February or March.

The strategists suggest being long on emerging market currencies during this phase, as tariff announcements historically lead to U.S. dollar weakness. However, broader tariffs tied to fiscal reconciliation remain uncertain, with Citi maintaining a cautious stance.

The Long-Term Fiscal Policy Gamble

In the final phase, Citi focuses on expansionary fiscal policies, including potential tax cuts and infrastructure spending. While these could bolster the economy, the report highlights significant uncertainty surrounding their implementation. Strategists suggest that any impact from fiscal stimulus is unlikely before 2026, advising patience for those eyeing curve steepening trades.

Trump-Era Market Lessons Revisited

Drawing comparisons to dollar performance during Trump’s first term, Citi strategists note delays in tariff implementation weakened the dollar in 2017. However, they believe 2018’s stronger dollar performance could serve as a better model for 2025 if tariffs are promptly enacted.