Shortly after the election, the mood in the markets was decidedly upbeat, and it’s not hard to see why. The clean sweep by Republicans brought with it the promise of extending current tax cuts and potentially introducing even more. However, as time has gone on, the harsh realities of the U.S. deficit have dampened some of that initial optimism, and progress in Congress has been slower than many had hoped. This has sparked some fiscal concerns, but there are two other significant issues overshadowing these worries.
First, let’s talk about the so-called “Trump Put.” During his first stint in office, Trump was fixated on the stock market. Even amid the chaos of the COVID-19 pandemic, he used the market as a personal scoreboard, quick to boast about its highs or blame others for its declines. This led to some impressive gains throughout his term, despite his often controversial rhetoric. Essentially, the “Trump Put” was the belief that he didn’t mean most of what he said and that his main objective was to keep stock markets and GDP growth on an upward trajectory.
Yet, in his second term, this approach seems to have shifted. In the first two months, Trump 2.0 appears to have taken a different course. His cabinet members are discussing detoxification and short-term challenges. While Trump still mentions the stock market now and again, he’s also making moves and issuing threats that are causing concern. A 10% dip in the S&P 500 since February is quite telling.
It doesn’t seem that the Trump Put has vanished entirely, but it’s certainly not as robust as it once was.
Next, there’s the “Fed Put” to consider. Trump’s initial term benefitted from low stock market valuations and plenty of fiscal room, and he capitalized on these conditions effectively. This time around, he faced the opposite: high valuations and a soaring deficit. On the bright side, the Federal Reserve had room to maneuver. The autumn interest rate cuts injected some life into the economy, and with the Fed funds rate sitting at 4.25-4.50%, there was ample room to slash rates if needed. Falling inflation gave the markets some hope and a buffer, especially if any economic hurdles emerged.
Now, however, the situation is less certain. Recently, we heard Fed’s Musalem hint at potential rate hikes, and Daly expressed waning confidence in her forecast for two cuts this year. Today’s inflation data came in a bit hotter than expected, and there’s a growing chance that the Fed might not have the flexibility to cut rates even if the economy starts to falter. The Fed Put might no longer be in play.
Many of these challenges stem from Trump’s own policies, like the tariffs, but they highlight why the stock markets are struggling and may continue to face downward pressure.
