The Free Press
President Trump has drawn the ire of Democrats, Ukrainians, transgender athletes, and college presidents, but people on Wall Street always assumed the president would never do anything to upset them.
Shortly after the election in November, for instance, Ed Mills, the Washington policy analyst at Raymond James, put it this way: “Donald Trump cares about independent validators. And the biggest independent validator of his success is the market. It’s a daily voting mechanism. It serves as a potential binding restraint to aggressive policies.”
Isaac Boltansky, director of policy research at global financial services firm BTIG, agreed. “Ultimately, the only entity that has real power over the president’s thinking about his agenda is the stock market,” he told CNN.
In other words, the market was going to be the one guardrail the incoming president would respect. Which made Wall Street very happy.
Judging from Trump’s words and deeds in the last few weeks, Wall Street got it wrong. The man who hates guardrails seems to have decided that the stock market is just one more that he has no use for.
In short, stock prices have fallen at least in part because investors are coming to the painful realization that Trump doesn’t seem to care so much for them anymore. In his first term, Trump viewed the market as his personal scorecard. Now? “You can’t really watch the stock market,” he told Maria Bartiromo on Sunday.
With the market nearing correction territory—defined as a 10 percent drop—since its mid-February peak, I asked Mohamed El-Erian, the bond whiz who is now president of Queens’ College, University of Cambridge, whether this realization was part of the reason stocks had fallen over the past month. He agreed. The steadfast belief that Trump would do whatever it took to keep the stock market happy was termed “the Trump put.” (A put is a derivative that protects its owner from price declines.)
Confidence in the Trump put began to erode when Trump and his economic team started talking about bond yields, rather than stock prices, as their metric of choice, El-Erian said. (Bonds can do well even if stocks are doing poorly.)
Even before this past weekend, the market had been falling, partly thanks to the specter of high tariffs. But then, over the weekend, Trump and others on his team seemed to say that even a recession would not cause the administration to pull back from its tariff strategy.
And because the tariffs could lead not only to slower economic growth but also higher inflation—stagflation, it’s called—investors can’t count on the Federal Reserve to bail them out as it has in the past, El-Erian told me. (That’s called “the Fed put” on Wall Street.) The Fed will hardly be eager to cut interest rates aggressively if tariffs are pushing up prices, he said.
Stocks rose after Trump was elected because investors were looking forward to deregulation and tax cuts. Yes, they assumed that Trump might use the threat of tariffs to gain concessions from trading partners. But he surely wouldn’t be so foolish as to erect high and long-lasting tariff walls. Instead, El-Erian said, “The things that the market really likes haven’t come yet,” and the thing the market doesn’t like—tariffs—are turning out to be more than just tactical threats.
The tariff war that Trump set off seems to keep intensifying. On Monday China began imposing tariffs on American chicken, wheat, corn, soybeans, pork, beef, and fruit, while Ontario added a 25 percent surcharge to electricity exports to Michigan, Minnesota, and New York. On Tuesday, Trump responded to the Canadian province’s action by saying he would put an additional 25 percent tariff on Canadian steel and aluminum—bringing the total tariff to 50 percent. Although Commerce Secretary Howard Lutnick and Ontario Premier Doug Ford quickly negotiated to walk back the measures, the markets weren’t mollified after Trump told reporters on Tuesday that “Markets are going to go up and they’re going to go down but, you know what, we have to rebuild our country.” That caused the S&P 500 to close down 1.1 percent on Tuesday, after a big 2.5 percent drop on Monday.
Some of the strongest backers of high tariffs acknowledge that Trump’s actions have pushed down stock prices—but they simply don’t care.
“Markets are responding rationally,” Jeff Ferry, the chief economist of the Coalition for a Prosperous America, told me. “Globalization shifted GDP from labor to capital,” he said. “If this works out, we will lift a share of profits back to labor.” In other words, the winners will be workers, and the losers will be investors. No wonder investors are unhappy.
“High American wages since 1870 have been due to the success of American industries inside a national economy,” Ferry said. “Around 1980 or 1990, the U.S. corporate elite threw up its hands and said, ‘We can’t compete. We need to force wages down by offshoring jobs.’ Trump is trying to get us out of that trap.”
But even supporters of tariffs aren’t entirely happy with the way Trump is going about things. Ferry said Trump is using tariff policy to try to achieve too many different objectives, such as restricting immigration and keeping fentanyl out of the country. “Companies will invest here based on long-term prospects. Don’t confuse the business community, which is looking for clarity,” he said.
Historians may look back on this as the time that Wall Street finally realized that the ideological realignment of the political parties wasn’t good for investors. As redefined by Trump, the Republican Party may no longer be the party of free markets.
Stephen Moore, a conservative economist, was one of Trump’s most important economic advisers in his first term. Now, Moore is aghast at Trump’s embrace of tariffs. “I think that the president’s emphasis on tariffs right now is misguided,” Moore told Fox News over the weekend. “The economy needs [a] pick-me-up, and tariffs are not a pick-me-up,” he said.
Not everybody is giving up on the Trump bump. Wall Street strategist Tom Lee told Fortune this month that a big rebound is “very possible” in the next few months. But the only way that’s going to happen is if Trump eases up on the trade wars.
Trump’s second term has just begun. He may yet back down from tariffs if the damage they do to the economy and the financial markets gets bad enough. From the looks of it, though, Wall Street’s pain is far from over.
Peter Coy, a former writer for the New York Times opinion section, writes about business and the economy.
For two opposing takes on Trump’s tariffs, read Erick Erickson’s piece, “MAGA’s Tariff Talking Points Are Bound to Backfire” and Michael Lind’s piece, “Why Tariffs Are Good.”