President Donald Trump’s whipsawing tariffs and budget cuts have sown profound uncertainty in the stock market. Investors are taking defensive positions as they wait to see how his economic actions play out. Tariffs, once set, can be modeled for how they will affect corporate profits, prices, and the broader economy.
Mass firings of federal workers can be analyzed for how they might increase unemployment. However, the real challenge for investors is uncertainty. There are several sources of uncertainty: on-again, off-again threats of tariffs; Trump’s refusal to rule out significant policy changes, followed by reassurances that a severe downturn is unlikely; and chaotic cuts to the federal government.
For many of Trump’s supporters, the president is doing what he should as a savvy negotiator—keeping trading partners like China and Mexico off balance to gain the upper hand. But for investors, such dizzying shifts have made the stock market “untradable” in the early months of the Trump administration, according to George Goncalves, head of U.S. macro strategy at MUFG Securities. “The volatility does not make this easy,” Mr.
Goncalves said. “It’s a challenging environment to have any conviction to hold a view.”
Perhaps the administration will escalate its economic brinkmanship, and stocks will fall again. Or perhaps the administration will abandon tariffs altogether, likely soothing the market.
The atmosphere of uncertainty and fear is spreading among consumers, contributing to increasing pessimism.
Investor turmoil amid Trump’s tariffs
A significant factor is Trump’s well-documented issues with corruption and vindictive politics.
His attacks on institutions involved in his legal troubles and the profiting of his family from various business deals, such as cryptocurrency sales and media agreements, are raising concerns about ethical governance. The United States’ standing as a financial giant is not solely due to its resources but also its historical stability and rule of law. Businesses require a secure environment to plan for the future, something that is increasingly threatened under Trump’s chaotic economic policies.
As the market continues to tumble, the question arises: When will the losses become too steep to ignore? Trump has stated that he’s not overly concerned with market fluctuations as he implements his protectionist agenda. However, the recent decline of nearly 9% from the S&P 500’s February 19 peak has caused Trump to acknowledge potential market volatility as he places tariffs on Canada, Mexico, China, and the European Union.
Marko Papic, the chief strategist at BCA Research, believes Trump’s breaking point could come sooner rather than later. He predicts that a 15% to 20% decline in the S&P 500 would compel the president to reconsider his trade war. “For sure he’s going to care about the stock market because he’s going to lose political capital if the economy goes into recession or if households feel poor,” Papic said.
“There’s absolutely no way he’s impervious to that.”
With a Republican-controlled Congress and a conservative majority in the Supreme Court, financial markets might be the last significant check on Trump’s power. “They don’t care what he thinks; they’ll just dump the stocks,” said Desmond Lachman, a senior fellow at the American Enterprise Institute. “That’s really the only check we’ve now got on ridiculous policies.”
Image Credits: Photo by Matt Benson on Unsplash
