The idea that markets are one of the few functioning checks on Trump rests on a simple premise: The president views index performance as a verdict on his leadership. After the S&P 500 reached 7,000 points for the first time in history on Wednesday, Trump wrote “AMERICA IS BACK!!!” on Truth Social. And when markets react negatively enough to a given policy, the White House tends to back down—postponing almost all of the steep tariffs that Trump introduced on “Liberation Day,” for example, after a week in which the stock market experienced its steepest slide since 2020’s COVID-induced crash.
“He asserts a point of view, and from that assertion, markets take it very literally, and in the beginning, really overreacted,” Jim Caron, the chief investment manager at Morgan Stanley’s Portfolio Solutions Group, told TMD. “Now, there’s an understanding that he’s going to make a claim, but that’s the opening bid.”
As Matthew Continetti wrote in the Wall Street Journal last week:
“Mr. Trump is testing institutional boundaries. Markets provide a real-time response. When the response is sharply negative, Mr. Trump goes in another direction.”
That said, those “sharply negative” responses from Wall Street have been fairly rare. “The only really huge reaction was Liberation Day,” Clifford Asness, co-founder of hedge fund AQR Capital Management, told TMD. The market slide in the run-up to Davos was simply a “bad day,” Asness argued.
Ahead of market open on Tuesday, January 20—following a long weekend in which Trump made increasing threats to acquire or invade Greenland and against European nations that intended to stand in his way—expectations were that the market would react very poorly. But the Dow Jones Industrial Average (DJIA) fell only 1.8 percent from Friday—a figure that major stock indices have regularly exceeded in the absence of any dramatic White House policy moves. The DJIA took a steeper dive in the last week of December, driven by non-political factors such as pessimism about technology stocks and seasonal trading dynamics. Treasury yields spiked during the week—the 10-year rate hit its highest level since August—but this can be attributed more to a historic sell-off in Japanese government bonds than Greenland tensions.
Part of the problem with viewing stock market fluctuations as a referendum on presidential actions is that stock prices react to far more than just White House policy, Mark Blyth, a political economist at Brown University, told TMD. Investor optimism about artificial intelligence, Blyth argued, is likely at least as important as anything Trump has done. “People have different reasons for reading different things into the tea leaves,” he said. “But ultimately, we’re literally at the tea leaves point.”
Others argue that investors are not fully pricing in the precariousness of the current political moment. “I might come down on the side [claiming] that the markets are a little complacent,” David Wessel, the director of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy, told TMD. He argued that risks to the rule of law and political stability—such as battles over the Federal Reserve’s independence and rising government debt—are only partially reflected in stock market participants’ actions.
He also noted that market dynamics could create a catch-22 in the coming years: “The markets assume Trump won’t do crazy things, but because the markets are so complacent, he can do crazy things.” And even if markets begin pricing in Trump’s disruptive actions as the new normal, they may stop reacting as much to any individual action—leading the president to interpret their silence as approval.
Brendan Walsh, a principal at Markets Policy Partners, a financial analysis firm, noted that investors don’t put money only into equity markets, and that other markets tend to be more attuned to perceptions of rising political risk. “People buy gold because they think bad things are happening in the future,” Walsh told TMD. “I think the general geopolitical risk of something bad happening is higher than it was a couple of years ago,” he said, linking the gold market’s recent ascent to broader geopolitical anxiety. Last week, gold passed $5,100 an ounce for the first time.
Trump’s decision to pick Warsh over a less orthodox and more pliable candidate, like National Economic Council Director Kevin Hassett, seems to have calmed investors significantly, with the spot price of gold dropping by roughly 9 percent on Friday and gold futures falling more than 11 percent. Silver plunged around 30 percent—the worst day for the metal since March 1980.
To Walsh’s point, government bonds also tend to be a better indicator of how government policy is affecting investors’ outlook. As of last week, the U.S. 10-year Treasury rate hovered around 4.25 percent—roughly two full points higher than the historically low rates of the 2010s—and the rising yields have sparked speculation about the “Sell America” trade, in which investors are increasingly hedging their bets on the U.S. Jeffry Frieden, a political economist at Columbia University pointed out that the current 10-year Treasury rate—while lower than it was a few years ago—is very high compared to most of the 21st century. “Over time,” he told TMD, “both foreign and domestic investors have demonstrated that they are gradually reducing the portion of their portfolio in the U.S.”
But, even so, Pastor, the University of Chicago finance professor, argues that it’s hard to claim the bond market is punishing the Trump administration. “Treasury yields are a bit below where they were a year ago, at the time of the inauguration,” he pointed out.
When taking the broad range of financial markets into account, “it’s just the U.S. dollar that has taken a beating,” Pastor observed. “That could very well be a feature, not a bug.” While it’s true that the dollar has slid over the past year, Trump has also said that he views the decline in the dollar as “great.” Some White House advisers, like the economist and Federal Reserve governor Stephen Miran, have argued for deliberately devaluing the dollar to boost U.S. manufacturing and close the trade deficit.
At the end of the day, with millions of participants and countless inputs, Wall Street indexes may be too complex to serve as proxies for presidential opinion polling. “You can point to whatever market you want,” to make a political point, Wessel said. “Things are great, and everybody loves the U.S.—the stock market. Things are terrible, and everybody hates the U.S.—the dollar.”
