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$50 trillion protection measure against Trump
How the $50 trillion stock market could serve as an unexpected frontier for Donald Trump in his new term as he considers extreme political action.
$50 trillion protection measure against Trump
Donald Trump is returning to the White House, but without many of the guidelines that were in place during his first term. Many Republicans who previously distanced themselves from Trump have either converted or been voted out of office. His former economic adviser Gary Cohn and other voices who have spoken out against tariffs are unlikely to be welcome in the new Trump administration. The special investigator Jack Smith intends to resign. In addition, the Supreme Court has presidents extensive immunity from prosecution granted.
The role of the stock market
Still, there is another force that could stop Trump from his most extreme impulses: the $50 trillion stock market. During his first term, Trump obsessed over the market's movements and viewed the Dow Jones Industrial Average as a real-time barometer of his success. He regularly tweeted about even the smallest market milestones, a drastic contrast to the reserved approach of his predecessors and successor.
Market reactions to Trump's policies
Lately, Trump has been "euphoric" about the market's initial surge following his stunning victory this month, sources told CNN. A market collapse triggered by a Trump policy idea - such as unreasonably high tariffs on China or aggressive intervention in the Federal Reserve - could at least make the president hesitant, if not force him, to abandon his plans.
"I don't see Congress or the courts limiting the president's authority. Ultimately, only the stock market has any real influence on how the president thinks about his agenda," said Isaac Boltansky, director of policy analysis at BTIG.
The past as a lesson
Investors could react very negatively if Trump tries to unseat Fed Chair Jerome Powell, with whom he has had a complicated and sometimes contentious relationship. During Trump's trade war with China, the market fell several times, partly because of fears about his trade policies. For example, in December 2018 the markets in turmoil because of concerns about the US-China trade war, which left Trump hungry for a deal with President Xi Jinping.
Economic concerns and their effects
Economists have warned that Trump's tariffs on China and proposals for blanket tariffs of 10% to 20% on all U.S. imports could be inflationary. "Donald Trump is interested in independent validators. The biggest independent validator of his success is the market. It is a daily voting mechanism," explained Ed Mills, Washington analyst at Raymond James. “It could act as a potential bond against aggressive policies.”
The reaction of the bond market
While the stock market initially celebrated the election results, the bond market did not. Treasury bonds fell in value, causing yields to rise, in part because of concerns that Trump's policies could drive up the national debt and boost inflation. This could slow the U.S. economic recovery, particularly through rising borrowing costs — both mortgages and business loans.
Summary
Higher bond yields can also depress stock prices by providing competition to bonds that are typically considered dull and making stocks appear more expensive in comparison. This development has already led to a retreat from record highs on the stock markets. “The sudden rise in 10-year Treasury yields (and associated inflation and deficit concerns) are some of the key factors worrying equity investors,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, wrote in a note to clients on Monday.
Trump has called for massive new tax breaks and a full extension of the 2017 tax law. But the bond market may have other plans. If there is a rebellion by bond investors against rising budget deficits, it could ultimately jeopardize Trump's efforts in Congress. “This will soon play out in the bond market,” warns Boltansky. “The market observers will tell us whether they are willing to buy the securities we issue.”
A similar situation could arise if investors and business leaders begin protesting Trump's plans to deport millions of undocumented workers - a move that could also fuel inflation. However, it remains unclear how drastic the market reaction would have to be before Trump would adapt. “What we don’t know is how much pain he’s willing to endure,” Boltansky said. Maybe we'll have an answer soon.