Author: Xu Chao, Wall Street Journal

As we enter 2026, the global macro market is undergoing a profound paradigm shift. Senior analyst David Woo believes that facing immense pressure from the midterm elections, the Trump administration is demonstrating a determination to turn the situation around at all costs, which will reshape the global asset pricing logic from energy to gold.

David Woo states that to compensate for a significant polling disadvantage and avoid losing the majority in Congress, the Trump administration's policy focus has fully shifted to winning the "affordability" debate. This means that the ultimate trading theme for 2026 will shift from mere reflation to aggressive deflationary measures—especially by exerting strong control over energy resources to significantly lower oil prices, aiming to bring gasoline prices down to a critical psychological threshold before the election. This strategy is intended not only to curb inflation but also to stabilize votes by improving the cost of living for the middle class.

Trump's previous actions regarding Venezuela signify the substantial end of the post-war rules-based international order. This move is not ideologically motivated but aims to directly control energy resources, hoping to win domestic "affordability arguments" by significantly increasing supply. Trump's goal is to lower gasoline prices to $2.25 per gallon before autumn, which will severely impact the crude oil market, with prices expected to drop to the $40 to $50 range.

Woo warns that as the U.S. abandons its traditional role as a guarantor of the international system, global geopolitical insecurity will sharply rise, providing strong support for gold and benefiting the defense industry. In contrast, emerging market stocks will face the risk of valuation reassessment, as the security premium for small economies will no longer exist in an era of returning power politics.

The Midterm Elections We Can't Afford to Lose

David Woo analyzes that the biggest backdrop for the macro narrative in 2026 is the midterm elections. Although Trump controlled market trends in 2025, his approval rating currently hovers around 40%, facing a significant deficit of about 20 percentage points compared to historical norms. For Trump, if the Republican Party loses control of Congress in November, his second term will be mired in endless subpoenas and impeachment nightmares.

Thus, the political theme for 2026 is "at all costs" (throw the kitchen sink).

White House Chief of Staff Susie Wiles has made it clear that Trump's campaign efforts in 2026 will be equivalent to those in the 2024 election year. This political survival pressure will directly dominate U.S. economic and foreign policy decisions, forcing the government to adopt unconventional means to please voters, with the core focus being to address the cost of living crisis.

A new structural bull market. At the same time, the market needs to be wary of the upcoming large-scale fiscal stimulus, as Trump is expected to use tariff revenues to issue cash checks to low- and middle-income groups, which will exert new upward pressure on long-term U.S. Treasury yields, fundamentally changing the macro liquidity environment in 2026.

New Energy Strategy: The Political Calculation of Lowering Oil Prices

To win the "affordability" debate, the Trump administration's quickest and most direct means is to lower oil prices. David Woo states that the recent U.S. actions against Venezuela are fundamentally motivated not by ideological export but by the desire to directly control the country's oil resources (which account for 18% of the world's proven reserves), thereby increasing supply and suppressing global oil prices.

The goal of this strategy is to bring U.S. gasoline prices down to around $2.25 per gallon by September or October.

For the market, this means that one of the core trades for 2026 is to short crude oil.

David Woo predicts that crude oil prices could fall to the high range of $50 or even $40 by the end of the year. This geopolitical maneuver will make OPEC the biggest loser, as its market control will be significantly weakened, while countries like India and Japan, as oil importers, will benefit.

Tariff Rebates and the Reversal of the K-Shaped Economy

In addition to lowering oil prices, another potential major initiative is large-scale fiscal stimulus. David Woo predicts there is a 65% chance that Trump will launch a new round of stimulus before the midterm elections. The specific path is to use the massive tariff revenues collected last year to issue $2,000 "tariff rebate" checks to Americans earning less than $75,000 a year.

To ensure the bill passes in Congress, Trump may bundle this rebate plan with the Democrats' concerns about extending Obamacare subsidies and use a reconciliation bill to bypass Senate obstruction. This strategy aims to transform the victims of the tariff war (consumers) into beneficiaries, achieving a "win-win" in both geopolitical and domestic economic terms.

This targeted stimulus for low- and middle-income groups, combined with the increase in disposable income from low oil prices, will benefit retailers serving mass consumption (Consumer Staples) and may reverse the current market consensus on the "K-shaped recovery," where only the wealthy benefit.

The End of the International Order and the Bull Market for Gold

The aggressive geopolitical measures taken by the U.S. to control oil prices send a clear signal to the world: the rules-based international order has ended. David Woo believes that when the world's most powerful country decides to act solely based on strength rather than rules, the international system that once protected the interests of smaller nations ceases to exist.

This shift has profound implications for asset allocation:

Short emerging market stocks: In the absence of rule protection in the new order, small countries face higher geopolitical risks, and the traditional "convergence trade" logic becomes ineffective. Long defense sectors: Security anxieties will force countries to significantly increase defense spending. Long gold: As the U.S. no longer acts as a benevolent guarantor of the international order, the credit foundation of the dollar as a reserve currency is eroded. In the context of expanding deficits and the rise of geopolitical realism, gold will become a key asset to hedge against a disorderly world, with over 10% upside potential even if the dollar does not collapse.

The Biggest Risk: The Stock Market and the AI Bubble

Despite Trump's attempts to win over voters through livelihood policies, the stock market remains his "Achilles' heel."

David Woo warns that the current high valuations of U.S. stocks are nearing those of the internet bubble era, and capital gains tax is a significant source of federal revenue growth. If the stock market falls by 20%-30%, it will not only trigger an economic recession but also lead to a sharp deterioration in the fiscal deficit.

The biggest risk in the market currently lies in the potential burst of the AI bubble. Wall Street generally expects AI-related capital expenditures to grow by another 50% in 2026, but increasing competition among models, hardware bottlenecks, and future return rate issues are making this consensus fragile. If tech giants (like Microsoft) show any signs of growth slowing in their earnings reports, and retail investors stop buying on dips, the market could face a severe adjustment, threatening Trump's re-election plans.

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