Shortly after the election, markets were in a great mood and it’s easy to see why. You had a Republican sweep with the promise to extend current tax cuts and maybe even deliver more. Since then, the tough math on the US deficit has eroded some of that optimism and Congress hasn’t moved particularly quick. That’s raising some questions on the fiscal front but two other questions loom large.
1) The Trump Put
In his first term, Trump was obsessed with the stock market. Even in the depths of covid, he treated it like a personal scorecard, always bragging about it or blaming declines on others. Ultimately, it led to nice gains throughout his term despite all the usual Trump rhetoric. The Trump put was the idea that he didn’t really mean most of the things he said and that keeping stock markets and GDP growth high was the overriding goal. That was the Trump put.
In his first two months in office, Trump 2.0 has been different. Members of his cabinet are talking about a detox and short-term pain. He still references the stock market but is also doing and threatening things that are problematic. The 10% drop in the S&P 500 since February speaks for itself.
I don’t think the Trump put is gone but it certainly doesn’t look as strong.
2) The Fed put
In his first term, Trump started with relatively low stock market valuations and ample fiscal space. He played that hand well. This time, he arrived with high valuations and a high deficit — not so pretty. One improvement though was the Fed, the autumn cuts put some juice into the economy but more importantly, with Fed funds at 4.25-4.50%, there was plenty of room to cut. The market was also seeing falling inflation and a long runway, particularly if anything went wrong in the economy.
Now it’s less clear that ammunition is available. This week we saw the Fed’s Musalem crack open the door to rate hikes, while Daly indicated she was losing confidence in her forecast for two cuts this year. Today’s inflation numbers were slightly hotter than expected and there is a growing possibility that the Fed won’t be able to cut at all — even if the economy stumbles. The Fed put might be gone.
Now much of this is Trump’s own doing with tariffs but it’s illustrative of why stock markets are struggling and could fall further.
