It’s not all Trump’s fault | USAEMALL.com

Good morning. The big market news over the weekend, if you want to call it that, was a Trump social media post reaffirming the president’s commitment to a strategic cryptocurrency reserve, which sent crypto prices flying. The idea is so stupid and wrong that Unhedged will not dignify it with comment. Email me about something else: robert.armstrong@ft.com.

The ‘it’s all Trump’s fault’ narrative 

Unhedged wrote last week about the “vibe shift”: a set of sentiment readings, market leadership changes, and weak economic data that together suggest that something fundamental has changed in markets and the economy, and not for the better.

The consensus view is that the vibe shift has been caused by the Trump administration. That the market narrative would coalesce around this idea makes psychological sense. Trump’s move-fast-and-break-things policy agenda has dominated the news while the vibe shift has unfolded; it is natural to draw a causal link between the two. We should be careful, though. The easiest market narrative isn’t always the right one, and focusing too much on the policy backdrop, however revolutionary, can obscure other parts of the picture. 

The charge sheet against the administration has three basic parts:

Policy uncertainty and policy sequencing are crushing sentiment. Recent sentiment survey results from the University of Michigan and the Conference Board showed notable declines, and respondents to both surveys singled out tariff policy and inflation as causes of concern. Analysts have also pointed to the Baker, Bloom, Davis index of economic policy uncertainty as evidence that the administration’s abrupt and aggressive approach to policy is wrecking the mood. The BDM index tracks media coverage, impending changes in tax policy, and the dispersion of economic forecasts. It has only ever been higher at the start of the Covid pandemic:

Part of the problem is that, in a reversal of the first Trump administration, market-unfriendly tariff and immigration polices have been the early priority, while market-friendly tax cuts and deregulation have been deferred. Here is Pimco economist Tiffany Wilding:

We think the initial reactions in the markets [to Trump’s election] — similar to those seen in the sentiment surveys — likely reflect greater focus on expected pro-growth policies, such as the potential for more near-term tax cuts and deregulation. However, the announcements since Trump’s inauguration have been more focused on potentially disruptive trade and immigration policy actions and steeper cuts in government services . . . Markets might be catching on to the shifting balance of risks

One bond manager summed it up more concisely: “The backdrop is becoming increasingly simple: most of the policy actions and proposals out of Washington are growth negative.” 

Sentiment is weighing on activity. The latest (but hardly the only) evidence of an economic slowdown came on Friday, when the government’s personal consumption expenditure report showed inflation-adjusted consumer spending falling by 0.5 per cent in January, led down by durable goods and especially cars. Services spending softened, too, while the savings rate rose. It’s the worst reading in since 2021:

Here is Barclays economist Christian Keller:

High uncertainty about tariffs, DOGE, budget deficits and a Ukraine peace deal has started to weigh on US activity . . . Indeed, the recent data suggest policy is already having negative spillovers . . . spending and trade data and expectations for an additional drag from uncertainty lead us to revise down our GDP forecasts for Q1 (-1.0pp) and Q2 (-0.5pp) to 1.5 per cent q/q . . . we still think that this amounts to more of a slowdown than a recession, but it is a significant deceleration from the growth rates of the past two years.

The view that we are seeing an policy uncertainty-driven slowdown fits with what we have seen in the bond market. Since Treasury yields peaked in January, their decline is almost all down to falling real rates — which are linked to growth — rather than to declines in inflation expectations:

Finally, uncertainty may weigh on investment, which would decrease longer-term growth. Torsten Slok of Apollo has gathered a range of Fed surveys of companies’ capital expenditure plans. All have been rising for a few years, but all ticked down in February:

Slok argues that “DOGE and tariffs combined are a mild temporary shock to the economy that will put modest upward pressure on inflation and modest downward pressure on GDP.”

The “it’s Trump’s fault” hypothesis is logical in broad outline but might easily be taken too far. Trump’s most important trait is his ability to make people emotional, and in markets coolness is all. So here are four points to keep in mind:

The economy has been running above its trend growth rate, and a slowdown is no surprise. The US is not, in the long run, a 2.5-3 per cent real growth economy, but that is what we have had for the last few years. Perhaps Trump policies made the step down to a more realistic 1-2 per cent growth come sooner, but this was coming, especially with the Fed’s policy rate parked at 4.5 per cent.  

One month is just one month (especially in January). Economic data is lumpy. Cold weather and fires probably has something to do with the latest spending figures. And weird stuff happens in January for whatever reason (look at January 2024 and 2023 in the PCE chart above). 

Even if the market is responding to the policy onslaught, what is happening looks like the reversal of the overhyped Trump trades of late last year, rather than something deeper. The round trip taken by small cap stocks — darlings of the “Trump will boost domestic growth” notion — exemplifies this:

Finally, it’s worth remembering that the biggest sea-change in the market — the recent underperformance of the Magnificent 7 big tech stocks — does not look like a response to Trump policy noise. If anything, one would think an uncertain policy backdrop would make these stocks more appealing, given that their growth is not driven by the economic cycle. Instead, their relative decline looks like a natural correction after an wild bull run, and the Mag 7 are not the only part of the market that has come to look overextended. There is a bigger question in markets than Trump: can US risk assets return to something resembling normalcy after several years of astonishing post-pandemic exuberance?

Trump is an attention-attracting machine. But attributing too much of what is going on in markets and the economy to the administration would be a mistake.

One good read

A basic blue suit.

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