Donald Trump’s return to the White House comes without many of the guardrails of his first term. Many Never-Trump Republicans in Congress have converted or been defeated, and former economic adviser Gary Cohn and other anti-tariff voices are unlikely to be welcome in the new administration. However, there is another force that could deter Trump from some of his most extreme instincts: the $50 trillion US stock market.
During his first term, Trump often viewed the Dow Jones Industrial Average as a real-time barometer of his success, regularly tweeting out even the most mundane market milestones. “I don’t see Congress or the courts limiting the president’s authority. Ultimately, the only entity that has real power over the president’s thinking about his agenda is the stock market,” said Isaac Boltansky, director of policy research at BTIG.
Investors could react very negatively if Trump made a move to push out Fed Chair Jerome Powell, with whom he has had a complicated and, at times, contentious relationship. During Trump’s first-term trade war with China, markets tumbled multiple times due to fears about his trade policy. Trump has vowed to impose 60% tariffs on China, a leading US trading partner and source of supplies and parts for American companies.
Economists have warned that these tariffs and proposals for 10% to 20% across-the-board tariffs on all US imports will be inflationary.
Market influence on Trump’s policies
“Donald Trump cares about independent validators.
And the biggest independent validator of his success is the market. It’s a daily voting mechanism,” said Ed Mills, Washington policy analyst at Raymond James. “It serves as a potential binding restraint to aggressive policies.”
However, not everyone is sold on the idea of the market acting as a guardrail.
Jeffrey Sonnenfeld, founder and president of the Yale Chief Executive Leadership Institute, said that Trump is unlikely to heed concerns voiced by investors. While the stock market initially celebrated the election results, the bond market did not. Treasury bonds tumbled in value, sending yields surging, in part because of concerns that Trump’s policies will add trillions to the national debt and pump up inflation.
If bond rates spike too high, they could slow down growth by raising borrowing costs, especially for mortgages and business loans. Higher bond rates can also depress stock prices by providing competition from normally boring bonds and making stocks look more expensive by comparison. “The bond market vigilantes will tell us if they are willing to buy the paper we are issuing,” said Boltansky.
It’s not clear how severe a market reaction would need to be before it would get Trump to recalibrate, but we may be about to find out.
