Don’t bet on Trump rescuing the stock market
If the president cares so much, why is he pursuing trade policies that are anathema to Wall Street?
Should investors rely on Donald Trump underpinning the stock market by backing away from trade threats as stocks fall? In short: not as much as they seem to.
Many market watchers believe the pattern of the administration announcing progress on trade talks after falls in the S&P 500 amounts to a “Trump put,” similar to a derivative that pays out when prices drop to a certain level.
The Trump put was on full display last week, when Mr. Trump delayed some tariffs due to be imposed on China next month, pushing up the S&P by 1.5%. The move followed a tumble in stock prices that had briefly taken the S&P down more than 6%—although the fall was triggered by his own action in imposing those tariffs in the first place.
There’s no doubting that Mr. Trump’s tweets have the power to move markets both up and down. It’s also obvious that Mr. Trump regards a strong stock market as a measure of success, something he has repeatedly referred to when it’s doing well. That’s led many to think that Mr. Trump will do what’s necessary to keep the market strong ahead of the 2020 election to win votes.
“Every investor I talk to, virtually without exception, gives me the identical argument that Trump cares about the stock market and will get a [trade] deal that will boost the economy and him in the elections,” said Tina Fordham, chief global political analyst at Citigroup.
She thinks investors are overconfident about the Trump put, though. “It’s better for him from an electoral perspective to force concessions and be seen to be tough, and to have that happen much closer to the elections in 2020,” Ms. Fordham said.
Another risk to the power of the “put” is that Mr. Trump keeps trying to support the market, but fails. Andrew Milligan, Edinburgh-based head of global strategy for Aberdeen Standard Investments, thinks the market is one of a number of “Make America Great key indicators” for the president, along with jobs and Fox News’s reports of corporate earnings. But even if Mr. Trump’s rhetoric offers support, the other countries involved in his trade fights might not play along, and stocks still suffer.
“There’s the possibility of policy error here by both sides,” Mr. Milligan said.
Last week might be an example of the Trump put having little lasting power—it took just one day for stocks to reverse all the gains from the tariff delay.
The logic of the Trump put is questionable, too. If Mr. Trump cares so much about the stock market, why is he pursuing trade policies that are anathema to Wall Street in the first place? The obvious answer is that he has multiple goals, some of which differ from those of global investors; he’s also unpredictable, which increases uncertainty about government policy.
Making things still more complex, Mr. Trump’s actions overlap with the Federal Reserve and the more-powerful “Powell put,” the idea that Fed Chair Jerome Powell will ease monetary policy to rescue a falling stock market. This is both controversial—the Fed should be driven by the economy, not the wealth of stockholders!—and obvious: If the market’s falling because investors fear a slowdown, the Fed probably fears a slowdown too, and should act. Falling stock prices can also crimp consumer confidence and household wealth, and so slow the economy.
At the moment, the Powell put works when the Trump put doesn’t. The Fed is concerned that Mr. Trump’s trade fights are a risk to the economy, and has already cut rates once. Futures traders are pricing as certain a cut next month, with a further one or two cuts likely by the end of the year. The more Mr. Trump talks tough on trade, hurting the market, the more the Fed is likely to cut rates. Equally, if Mr. Trump can persuade the Fed to slash rates—as he recommended in a tweet on Monday—it is less risky for him to ramp up the action on trade.
This creates some perverse signals. Lower rates can help stocks by boosting the valuation of future profits, even if profits are likely to be lower in an economy held back by rising tariffs. Disentangling exactly how much stocks would be down by if the Fed wasn’t expected to respond is impossible, but prices would surely be lower.
Put this together and the Trump put is less reliable than many think, especially when combined with Fed moves. Even if the Trump put exists, the president could be freed to become more aggressive on trade if the Fed helps out with lower rates. At least as likely is that the Trump put fails, either because the president thinks electoral success rests more with bashing trade partners than supporting stocks, or because trade partners fail to play along. Be wary.