Has the market’s Trump bet been wiped out? Maybe – or maybe not

Wall Street has been betting on the “Trump put” – predicting that a potential backlash from financial markets would discipline the US president’s use of his beloved tariffs. It may have lost the bet, or perhaps not.

The thinking is that Donald Trump’s penchant for using the stock market as a report card meant that sell-downs that showed investors were rattled by a policy would cause him to quickly ditch those plans. Various Wall Street firms guessed how much pain he could tolerate in the S&P 500 before retreating. That index level became known as “the Trump put,” in reference to a put option.

Donald Trump’s escalating trade war has set off a market sell-down on Wall Street and on stock exchanges around the world.Credit: Bloomberg

Sharemarkets around the world were battered by Trump’s announcement on Tuesday that the tariffs on Canada, Mexico and China that he had paused last month were now going ahead, with a 25 per cent levy on imports from Canada and Mexico and an additional 10 per cent on those from China (on top of the pre-existing tariffs).

Canada and China retaliated immediately, with Canada announcing an initial 25 per cent tariff on about $US20 billion ($32 billion) of US exports and foreshadowing tariffs on another $US87 billion or so within weeks. China, targeting LNG and agricultural imports, imposed tariffs of up to 15 per cent and blacklisted dozens of US companies. Mexico said it would announce its response at the weekend.

With Trump already threatening to retaliate against the targeted countries’ retaliatory tariffs, the potential for a cycle of tit-for-tat rounds of tariff increases is real. Confusing the picture further, Trump’s Commerce Secretary Howard Lutnick said after the close of Wall Street overnight that the president would “probably” announce a compromise with Canada and Mexico and scale back their tariffs as early as Wednesday (in the US) this week.

No wonder markets are gyrating.

Since Trump announced “THE BIG ONE” a fortnight ago – his plan to impose reciprocal tariffs on every economy that has tariffs, value-added taxes or trade barriers of any kind – the US sharemarket has fallen 6 per cent. The “Magnificent Seven” big tech stocks that have powered the market over the past two years have tumbled 11 per cent.

Given that it is Trump, the prospect of a U-turn within days of announcing the tariffs on his three major trading partners – economies that represent more than a third, or well over $US1 trillion, of America’s imports – shouldn’t be discounted. His administration seems to thrive on unpredictability and chaos.

Perhaps the market response, or a belated understanding of the turmoil the tariffs would create for US companies and the inflationary impacts they would have on consumer prices, might have finally sunk in.

The tariffs would, for instance, go a long way towards destroying the US auto industry, which is highly integrated with Mexican and Canadian supply chains. There are some estimates that those ructions could add up to $US12,000 to the price of an SUV. Others say the average price of a car in America could rise by $US3000 or more.

Combine more fearful consumers with anxious corporates, reduced investment because of the increasing uncertainty and a sliding stockmarket, and there could be a material impact on economic growth.

They would also have a material impact on share prices, cutting corporate earnings, reducing price-earnings multiples and increasing the risk premiums for US stocks. Goldman Sachs has estimated that they could lead to a 5 per cent decline in the S&P500.

Consumers have also woken up to the threat of the tariffs, with consumer confidence falling and expectations of inflation (which tend to be reflected in consumers’ behaviours) rising.

Combining more fearful consumers with anxious corporates could result in reduced investment because of the increasing uncertainty and a sliding stockmarket, and there could be a material impact on economic growth.

Trump’s Treasury Secretary Scott Bessent has said the administration is targeting the 10-year bond rate, hoping to lower inflation and interest rates, along with the $US1 trillion-plus annual cost of servicing the government’s $US36.1 trillion pile of debt.

The bond rate is heading in the right direction for, from the administration’s viewpoint, the wrong reasons. The yield on 10-year bonds has fallen from 4.55 per cent two weeks ago to 4.22 per cent, and the yield on two-year notes is now below 4 per cent, a threshold last breached in October last year.

That’s because bond investors see an increased risk of an economic slowdown.

They’re worried about the potential for a recession caused by Trump’s trade policies and Elon Musk’s disruptive and potentially destructive assault on government agencies and their staff.

Trump’s tariffs, so far, have been imposed in response to the roles Trump claims China, Mexico and Canada play in the importation of fentanyl to the US – even though imports from Canada are minuscule. The targeted countries bought themselves a pause last month by promising to do more to fight fentanyl imports, and perhaps more promises will give Trump an excuse to back off again.

In circumstances where the actions of the US government are so erratic and unpredictable, the only safe place for investors is on the sidelines.

The reciprocal tariffs that he has said are coming next month, along with sector-specific tariffs like those he has announced on steel and aluminium imports (autos, semiconductors, pharmaceuticals and timber are on the list), are far more directly related to trade and America’s trade deficit and will apply far more broadly than those imposed or announced so far.

Imports from any country will trigger a review of its tariff, tax and trade practices – including things like Europe’s digital services taxes or Australia’s local content requirements – and potentially lead to new tariffs. Trump has already said he will slap tariffs on the European Union, which has pledged to retaliate.

The US deficit, of course, has little to do with America’s trade partners somehow taking unfair advantage of it, but it is a result of macro factors. Essentially, America consumes, invests and borrows more than it saves.

That hasn’t, however, stopped its economy from significantly outperforming almost all the countries with which it has a trade deficit. So it could be argued that access to cheap imports of goods the US either doesn’t manufacture or where it isn’t a sufficiently competitive manufacturer has been good for the US economy.

Indeed, the increasing post-war globalisation of trade has (had?) increased US economic influence within the global economy and financial system and driven the pre-eminence of the US dollar -- with all the geopolitical authority that has provided to the US – not diminished it.

Most modelling of the impact of the tariffs already announced or imposed show that, while the damage on the exporting economies would be greater, the US would still suffer materially, with lower growth and higher inflation.

That’s why sharemarket investors, exposed to a market that has massively outperformed other markets thanks to the performance of the big tech stocks, have been nervous about the prospect of another Trump trade war. They know it would hurt American and global growth.

They also know that uncertainty equals risk, and that the fate of their economy and their wealth is now dependent on the daily whims of Trump. He might, given his comments on trade and other economic issues, be economically illiterate, but he now completely dominates US policymaking.

With the uncertainties proliferating, the risks now increasingly real and rising and investors unsure whether the “Trump put” still exists or was just a delusion, financial markets are likely to become increasingly volatile.

Are the tariffs announced on Tuesday still going to be in place on Friday? In circumstances where the actions of the US government are so erratic and unpredictable, the only safe place for investors is on the sidelines until an extremely fluid and risky policy environment becomes more settled.

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