Wall Street's High Conviction Bets Unraveled With Trump's Trade Rebuke

As the new presidency began, traders initially had a clear strategy: go all-in on stocks and assets tied to the "America First" theme. This included companies like Tesla Inc., cryptocurrencies, and smaller firms benefiting from the policy direction. However, as economic conditions deteriorated and policy decisions became increasingly volatile, relying on a few bold investment calls has proven to be a costly mistake in the Trump era.

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This approach has particularly hurt investors with concentrated portfolios and those attempting to time the market, especially after another brutal week on Wall Street. Escalating trade tensions have compounded the problem. On Friday, data revealed a sharp decline in consumer confidence and a rise in inflation, just ahead of what some traders dubbed “Liberation Day” for tariffs. As a result, the Nasdaq 100 plunged 2.6%, Treasury yields fell as investors sought safety, credit risk indicators climbed, and gold soared to another record high.

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For investors who placed big bets on dominant market themes—such as the "America First" trade or the era of Big Tech—these developments have been another significant setback. In contrast, institutional investors who have long championed diversification have weathered the storm far better.

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“We’re dealing with persistent inflation, geopolitical uncertainty, and rising recession risks,” said David Schassler, head of multi-asset solutions at investment firm VanEck. “The worst thing an investor can do is make binary bets. Diversification is absolutely crucial.”

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Strategies that emphasize diversification have been outperforming, particularly those incorporating systematic trading, inflation-protected assets such as commodities, and cheaper stocks rather than high-growth names. While a wide array of investment approaches are thriving, the real "Trump trade" in this environment appears to be the ability to hedge dynamically amid unpredictable policy changes.

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The economic landscape has made many once-reliable trades lose their edge. On Friday, inflation expectations surged to their highest level in 32 years, coinciding with weaker-than-expected consumer spending data. As a result, economists have lowered their U.S. GDP growth forecasts while raising their inflation predictions. Adding to the market uncertainty, Trump announced a 25% tariff on auto imports on Wednesday, with further retaliatory measures set for April 2.

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Rather than calming investors, Federal Reserve officials have warned that the trade war is complicating their job. Boston Fed President Susan Collins noted that inflation will “inevitably” rise due to tariffs, at least in the short term, while St. Louis Fed President Alberto Musalem cautioned against assuming these price hikes will fade quickly.

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The S&P 500 lost 1.5% for the week and is now on track for a 5% decline in the first quarter of 2025. Meanwhile, the Magnificent Seven stocks—tech giants that have led the market in recent years—are poised for their worst first quarter in at least a decade.

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On the other hand, investment strategies that allocate across multiple asset classes are seeing their best stretch in years. The S&P Multi-Asset Risk Parity Index, which tracks such strategies, has outperformed the S&P 500 by over 7 percentage points this quarter—the largest margin since 2018.

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Investors seeking gains in today’s volatile markets are faring better when avoiding concentrated positions, particularly in indexes dominated by a few large companies, such as the S&P 500 and Nasdaq 100. According to Bloomberg Intelligence analyst David Cohne, actively managed large-cap growth mutual funds that have over 40% of their portfolios in Magnificent Seven stocks have dropped an average of 8% this year. By contrast, a quant strategy that invests across asset classes based on investment factors has gained 3.5%, as tracked by Societe Generale SA’s alternative-risk premia index.

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“If uncertainty remains the dominant theme, we expect a bull market for diversification,” said Paisley Nardini, an asset allocation strategist at Simplify Asset Management. “The early part of 2025 has been all about the rotation trade, favoring previously neglected areas of the market.”

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Gold has been one of the standout winners this year, reaching a series of record highs and heading for a 17% quarterly gain—the strongest since 1986. Investors have poured over $12 billion into major gold-backed exchange-traded funds (ETFs) in the last two months, the highest inflows since 2020.

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One of the funds benefiting from this shift is the VanEck Real Assets ETF (RAAX), which has outperformed the S&P 500 in 2025. Schassler, the fund’s manager, had maximized its gold exposure three years ago and now predicts that gold prices could rise to as much as $5,000 within the next 18 to 24 months.

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Wall Street firms are also shifting to a more defensive stance. Max Kettner, HSBC’s chief multi-asset strategist, downgraded U.S. stocks, investment-grade corporate bonds, and high-yield debt to underweight this week due to weakening economic data and the surge in tariff announcements. The bank also further increased its overweight position in gold to hedge against stagflation risks.

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Despite this shift away from U.S. assets, HSBC is not ready to declare an end to the dominance of American markets. “We are tactically more cautious and currently sellers of U.S. equities and risk assets,” Kettner said. “But calling for the end of U.S. exceptionalism from a long-term structural perspective is, in our view, an overstatement.”

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As traders navigate an increasingly uncertain landscape, one thing is clear: those who have stuck to rigid, one-dimensional strategies have been hit the hardest. In contrast, investors who have embraced flexibility and diversified their portfolios have found themselves on much steadier ground.

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