If there was one thing investors thought they knew about Donald Trump, it was that he was on their side. He was the president who was going to reflate the economy, unleash animal spirits and drive up returns. Now that certainty has been demolished by a trade war, and two years of market history is being rewritten.
Take Treasuries, where 30-year rates - which rose a full percentage point to as high as 3.5% - have plunged so fast that they’re all the way back to where they were on Election Day. Equities are still smartly up, but the rate of gain has slowed to where the Trump stock market isn’t much more buoyant than Barack Obama’s.
How fast sentiment can shift when price action so depends on politics. Where once Trump was maniacally focused on markets as a report card on his policies, the devotion has been replaced by a fixation on tariffs. It has smacked of betrayal to investors caught on the wrong side.
"He’s gambling that the US economy is strong enough to withstand some of the aggressive trade policies that he’s following through with," Evan Brown, head of multi-asset strategy at UBS Asset Management, said in an interview at Bloomberg’s New York headquarters. "He likes to push things to the edge."
For traders who lived by Trump’s bluster over his first two years, the thought that they might die by it, too, has been harrowing. Maybe the economy, teeming with confident consumers and rock-bottom unemployment, gives cover to his foreign entanglements, but some are starting to wonder where it ends.
For a glimpse into the reversal of investor optimism, look no further than the $15.9 trillion Treasury market. It’s not just the potential hit to growth from tariffs. It’s that investors increasingly see the president’s policies as too hard to gauge, especially after his latest skirmish with Mexico. Trump said in a tweet Friday that the plan for tariffs on that country’s goods had been indefinitely suspended after a deal on immigration was reached.
The yield on 30-year US bonds dropped this month to a level unseen since the day after the November 8, 2016, US presidential election. The long bond yield is hovering at about 2.57%, down from as high last year as 3.46%, and benchmark 10-year yields touched multiyear lows on Friday.
"The whole point of easing regulation was to limit the red tape and limit your uncertainty in doing business,’" said Peter Boockvar, chief investment officer at Bleakley Financial Group. "The tariffs, and even just Trump’s tweeting alone, has re-created another form of uncertainty that limits and clouds your ability to do business. If you’re not confident on the outlook then it doesn’t matter what the tax incentives are, you are not going to increase capital spending."
Going by Fed funds futures, traders see it as certain that Trump this year gets the rate cuts he’s been pressuring chair Jerome Powell to do. Yet even that won’t serve to combat the political uncertainty the president has created, said Markus Allenspach, head of fixed-income research at Julius Baer.
To be sure, despite some lumpy data, no catastrophe has befallen the economy. The unemployment rate, at 3.6%, is near a 50-year low. Consumer confidence is soaring, inflation is muted and wages have started to tick up, albeit modestly. Trump’s biggest gift to markets, the easing of corporate tax burdens by way of Republican-backed reform, caused company profits to soar. Some argue that’s created the perfect environment for the president to push his trade policies to the limit.
"The president believes he’s got some equity built up so he can afford a bit of a downturn in the market," said David Spika, president of GuideStone Capital Management. "He can achieve his trade goals, which in his mind is what he promised the voters and he has a mandate to do that without completely decimating the market. And once the trade issue gets resolved, in his mind, the market turns back up and we’re all good."
With that as his backdrop, Trump has opened battle after battle in the theater of global trade. What started as a hike in duties on washing machines and restrictions on tech exports has morphed into a multi-front blitz that threatens to upend long-standing geopolitical relationships, harm growth and increase prices on everything from whiskey, to cars, to avocados.
For a few days, anyway, the entirety of Mexican imports were in Trump’s sights. The enemies list has encompassed India and Turkey, Japan and the European Union. Traders lashed by fusillades of trade-related headlines are finding it too much to deal with. There are too many variables, too many developments to keep track of, they say, and less confidence that the global economy can withstand a protracted skirmish.
"Can he change tack quickly enough with enough foresight or does he push it too far?,” asked Ryan Primmer, head of investment solutions at UBS Asset Management. "That’s the thing he’s going to be betting on with the markets."
While stocks just had a huge week in part because of a dovish turn by Powell, tensions are visible there, too. Though Trump touts the market’s strength as a sign of his prowess and likes to compare it to performance under his predecessor, the data show a murkier picture. Almost 950 days have passed since the 2016 presidential election and the S&P 500 is up 35%. That far into Obama’s term, the benchmark had gained the same amount.
To UBS’s Brown, that’s been the gamble all along. "People always knew, as far as the market’s concerned, a double-edged sword to electing Trump," he said. "They knew there would be very stimulative fiscal policy and tax policy that is good for corporates, but also knew in the background that he had inclinations to be a protectionist and he has shown that."