The world’s financial markets are currently consumed by a singular, vital question: Just how reckless is Donald Trump?
It’s why we see the stock market euphoric over the slightest bit of White House news that isn’t completely bonkers.
This past week, the S&P 500 index rose by 7.1 per cent over four trading days. Moves that big are rare and tend to happen only when markets are bouncing back from some long-term economic disaster.
The catalyst this time was the President backing off threats to undermine the independence of the Federal Reserve, which is part of the bedrock of US$30-trillion market for U.S. Treasuries.
Another monster rally was triggered when Treasury Secretary Scott Bessent told an investor summit that the tariff standoff with China was “unsustainable.” As though it were a mystery to anyone that an all-out trade war with the world’s manufacturing superpower would be bad for all concerned.
The more this administration walks back its terrible ideas, the more the world’s problems magically dissipate. Because there is nothing really wrong economically. At least nothing on an all-consuming planetary scale – not yet, anyway.
The crisis we all face has been conjured out of nowhere by Donald Trump. Unlike the financial disasters we’ve all come to know and fear, this one can be turned off.
That’s arguably the thing keeping the stock market afloat – the belief or the hope that the President would not be so reckless as to utterly sabotage the global economy or trigger a full-blown financial meltdown.
Despite how volatile markets have been of late, it’s not as though there is blood running in the streets. The S&P 500 is down by just 6.1 per cent so far this year. The TSX is flat.
This is a remarkable outcome, for a couple of reasons. First, it’s completely out of sync with how this year has felt. Sentiment indicators allude to widespread misery and lots of regular investors have been rattled by this year’s descent into chaos.
And yet, a globally diversified portfolio of stocks and bonds would likely be sitting on a small gain on the year.
Secondly, the stock market’s resilience stands in glaring contrast to the dark forces that lurk barely at bay.
The President has repeatedly proven willing to flirt with disaster until the very last moment.
His “Liberation Day” travesty triggered a panic in markets that came perilously close to spiraling out of control. The S&P 500 lost 9.1 per cent in one week, combined with an alarming drop in Treasury prices and the U.S. dollar that suggested large global investors were beginning to desert the United States.
It was a predictable reaction to the U.S. picking a fight with nearly every country on earth, simultaneously. Ultimately, market mayhem forced Mr. Trump to back down.
Financial markets are also clearly hostile to the idea of firing Fed chair Jerome Powell, which Mr. Trump floated last week. “If I want him out, he’ll be out of there real fast, believe me,” Mr. Trump told reporters.
Fed independence is considered sacrosanct by bond investors, and politicizing the central bank in such a way would spark a “systemic financial event,” Tim Mahedy, chief economist at Access/Macro and a former adviser at the Federal Reserve Bank of San Francisco, wrote in a recent note to clients. The market reaction, he said, would be “apocalyptic.”
Again, Mr. Trump balked, saying this week he has no intention of firing Mr. Powell.
He has yet to cave, however, on his trade war with China, which is threatening to metastasize into a global economic shock.
By slapping tariffs of 145 per cent on imports from China, combined with Chinese retaliation, Mr. Trump has put nearly US$600-billion in two-way trade at risk.
Meanwhile, there is a supply chain shock shaping up that could be reminiscent of the COVID-19 pandemic, when shipping rates soared and product shortages were rampant.
Just since the start of April, container bookings from China to the U.S. have dropped by around one-third, shipping company Hapag-Lloyd reported this week. Other estimates have put the decline at more than 60 per cent.
The World Trade Organization estimated that merchandise trade between the two countries could drop by 80 per cent.
Executives from some of America’s biggest retailers, including Target Corp., Walmart Inc. and Home Depot Inc., warned Mr. Trump this past week of empty store shelves and rising prices, according to an Axios report.
Every day, the pressure on the supply chain builds. If a resolution to the trade war takes too long, the system may not be able to catch up to the eventual flood of reorders.
Ryan Petersen, chief executive officer of supply chain firm Flexport, said a surge in shipping prices could rival that of 2021-22.
“If Trump reverses course very soon, he can head off the worst of this catastrophe,” Mr. Petersen wrote on social media.
We are left with little choice but to put our faith in Mr. Trump, the one person who can save us from himself.