Equities built on their two-day momentum this Wednesday, the rally being spurred by President Trump’s remarks designed to pacify concerns about an intensifying Sino-US trade war and potential threats to the Federal Reserve’s autonomy. The President, on the previous evening, assured the media that he does not plan on dismissing Federal Reserve Chair Jerome Powell. This stance deviates from recent market speculations which resulted in a near 1,000-point slump in the Dow Jones Industrial Average (^DJI) on the preceding Monday.
Simultaneously, Trump hinted at a potential thaw in the trade tensions with China, implying that the hefty 145% tariffs would be considerably reduced. Analysts interpreted this as an indication that the President might be giving more weight to the market’s response to his policies than he had earlier.
Hitherto, the Trump administration had maintained that they were not focused on the stock market even amidst a major sell-off. The President’s latest comments on the issues with Powell and his conciliatory words on China suggest a possible change in the administration’s view towards market reactions, according to Neil Dutta, head of economics at Renaissance Macro.
Trump’s recent rhetoric has been instrumental in boosting the stock market. Michael Kantrowitz, Piper Sandler’s chief investment strategist, asserts that ‘Trump’s policy discourse’ is the primary market mover at present. Accordingly, the news of tariff deescalation has given stocks a lift, while rumours of stricter measures have led to a drop.
The market has been binary in its response to these developments, causing stocks to surge with news of tariff reductions, but also plummeting at signs of a more rigid stance from the Trump administration. Even though there’s still some way to go before the situation stabilizes, Kantrowitz urges investors to respect the traditional remedial phase where market corrections commence as the core issue begins to ‘recover’.
Trump’s comments on Tuesday signify a progressive step on this front. The S&P 500 (^GSPC) saw a rise by more than 3%. The Dow Jones Industrial Average (^DJI) surged by 1,100 points or approximately 2.8%. The Nasdaq Composite (^IXIC) witnessed the largest gain, soaring by an impressive 4.1%.
A subsequent report by the Wall Street Journal that China’s tariff rate is anticipated to drop to between 50% and 65% from the current 145% added more momentum to the rally. This followed Trump’s previous social media intimations that swiftly terminating Powell’s term was a high priority, a move that raised anxiety levels in the market.
Such negative sentiment had a considerable impact on the stock market at the beginning of the week. Equity strategists warned that Powell’s potential dismissal could skyrocket bond yields and subsequently pressure stock prices. In effect, the 10-year Treasury yield leaped to 4.4% on Monday.
Acknowledging Trump’s recent emphasis on market reactions, Keith Lerner, co-CIO at Truist, concurred with Dutta, suggesting some level of attention from the Trump administration is being directed towards market fluctuations. However, this doesn’t necessarily mean the stock market’s climb will follow a straight path.
As Lerner points out, a critical concern is whether economic data will show signs of weakening later in the year, causing the S&P 500 to revisit its year’s low at 4,982. This could be a potential threat, but investors in the current scenario have to navigate a potentially frisky trading range.
Trump’s shift in tone is significant, following his recent statement on social media where he suggested that ‘accelerating the end of Powell’s term is sorely needed.’ This comment, as one could expect, fueled market anxiety and put downward pressure on stocks at the beginning of the week.
Equity strategists noted a potential risk in this tension as they argued that the abrupt discontinuation of Powell’s term could cause an increase in bond yields and simultaneously depress the stock market. The 10-year Treasury yield exhibited this tension as it rose quickly to 4.4% on Monday.
It is essential to understand that market actions don’t solely depend on policy statements or shifts in the administration’s stance, but also can be dictated by anticipated economic data. Among many, the most pivotal question is – will the economic data tumble later this year as projected by some market analysts? If so, this might lead to the S&P 500 revisiting its lowest value of the year, which stands at 4,982.
Given the uncertainty shrouded over the future economic data, the path ahead for stocks is expected to seesaw. This means investors might find themselves trapped within a volatile trading zone in the near future.
However, amidst this market volatility, it’s important for investors to stay patient and observe the concrete outcomes of proposed policy shifts. While the surge resulting from the tariff deescalation is encouraging, worries over potentially stiffer measures could alter the trajectory.
Ultimately, the current market trajectory appears to be a complex mix of policy rhetoric, potential economic outcomes, and market emotion. Investors are advised to keep a close watch on these multifaceted dynamics as they navigate this labyrinthine financial landscape.