Can anything get in the way of this US-led stock market rally? Well, yes, plenty of things can.
But no sooner does an issue arise than investors look past negative interpretations and focus on all the good reasons to increase their exposure to equities
Just look at Trump’s tariffs. As far as investors are concerned, the biggest risk came when reciprocal tariffs were first announced by President Trump back on ‘Liberation Day’, the 2nd of April.
The four major US stock indices (the Dow, S&P, NASDAQ and Russell 2000) were already coming off highs hit earlier in the year, or towards the end of the previous year, as analysts pared back their expectations for further rate cuts from the US Federal Reserve.
The sell-off turned into a rout which, within a few days, took both the S&P and NASDAQ back down to levels last seen fifteen months earlier.
Yet a few months later and both indices were making a succession of fresh all-time highs.
Investors were encouraged by President Trump’s repeated deadline postponements, coming to live by the rather unfair mantra that ‘Trump Always Chickens Out’, or the TACO trade.
As the new deadlines approach (that is, the 9th August for China and the 1st August for everyone else), there’s been news that Japan and the US have struck a deal.
This has boosted speculation that other significant trading partners, such as the European Union and South Korea, will also strike deals before the cut-off date, thereby avoiding the cripplingly large reciprocal tariff charges which would put an enormous dent in global trade with the US.
On top of this, investors are cheering the fact that trade hasn’t ground to a halt, that Mr Trump can point to the dollars made through tariffs that are in place and that US inflation hasn’t skyrocketed as a result of tariffs.
This last point should be of little surprise given that few tariffs have actually come into force so far. The outlook is cloudy at best.
Yet early evidence suggests that the tariffs in effect have been absorbed by US importers and manufacturers, rather than passed on to consumers.
That sounds like good news.
But ultimately, if companies are absorbing much of the tariff costs (and Goldman Sachs reckons that tariffs will baseline around 15%) that will affect their profitability, calling their valuations into question.
But there’s another issue which should give investors pause for thought. President Trump has repeatedly criticised the Federal Reserve Chair Jerome Powell.
Mr Trump accused Mr Powell of acting politically by cutting rates to help the Democrats ahead of last year’s election, while refusing to cut them further since Trump won the Presidency.
Mr Trump has dressed this lack of action from the Fed Chair as penalising house buyers while costing the US government $1 trillion in extra interest rate payments on its debt. Mr Powell’s term expires in May next year.
But the President is talking of announcing his successor by September. This would effectively create a ‘Shadow Chair’ which would seriously undermine Mr Powell’s authority.
And, it is assumed, that Mr Trump’s pick would rush to do his boss’s bidding by cutting rates aggressively.
When a story came out that Mr Trump had openly discussed firing Chair Powell, the markets reacted badly.
The US dollar slumped, as did equity markets, while precious metals soared.
Yet even as Trump maintains his attacks on Powell, raising the possibility that the latter may resign anyway, markets have largely ignored the issue.
Or have they? Perhaps they are behaving rationally, as the prospect of sharply lower interest rates only gooses the stock market further.
But investors should be careful what they wish for.
It’s not just an issue of central bank independence. Aggressive easing could trigger another round of inflation, which will hurt Trump’s voting base far more than his rich friends.
It would also undermine the US Treasury market and the US dollar.
Should this come to pass, then it won’t be Jerome Powell who gets the blame, but Donald Trump himself.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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