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“Stock vigilantes” is a term that only recently entered the markets vernacular. It is time to retire it again equally swiftly.
It refers to the idea that if the going gets tough, and US stock markets tumble in value, Donald Trump will sit up, take notice, and reverse some of his more aggressive policies. Typically, this is a task left to the bond market, but here we have a president who basked in the reflected glory of upbeat stock markets in his first term. Surely this sensitivity cuts both ways? Investors and analysts certainly assumed so. (Full disclosure: so did I.)
This notion had its first trial run in Trump 2.0 in February, when Trump declared he was serious about slapping hefty trade tariffs on supposed friends and neighbours in Canada and Mexico. Alas, stock vigilantes were found lacking. Stocks did stumble, but far too mildly to ring any alarms in the Oval Office. That left the president and his administration free to double down, not back down. Stronger vigilance was required, it seemed.
One month later, and markets are clearly in a more pronounced tizz, with US stocks briefly entering so-called correction territory — down a tenth from their most recent high. Whether they have further to fall or not is, of course, a matter of opinion. Ask two analysts, get at least three answers.
Either way, even at this point, the scale of the rethink on the US among money managers is quite extraordinary. In its latest monthly survey of fund managers around the world, released on Tuesday, Bank of America found the biggest swing out of the US on record. A net quarter of the fund managers surveyed said they were now underweight in US stocks — holding a smaller allocation than global benchmarks would suggest, a shift lower of some 40 percentage points from the previous survey. Nearly 70 per cent of investors say the much-vaunted concept of “American exceptionalism” has now peaked.
Investors are in a foul mood. The bank’s survey also found the second-biggest rise in levels of pessimism — those saying they expected the global economy to weaken — since its records began in 1994. For context, the biggest increase was five years ago, in the teeth of the global Covid lockdowns.
This is more like it — an unambiguous message from Wall Street to the president that his constant flip-flopping over tariffs and what we might euphemistically call his geopolitical realignment are a black mark against a stock market that has led the world for as long as most fund managers can recall.
Again, though, Team Trump claims to be unruffled. In fact, it is turning the whole idea on its head, seeking to convince the world that this is what they wanted all along — an astringent, purifying reset in markets that is a necessary step to Make America Great Again. I missed this from the campaign trail, too.
Treasury secretary Scott Bessent, the very same man who declared last year that “Kamala Harris will start with a Kamala crash in the stock market, and then it will be the Kamala crash in the economy”, is now saying he is “not at all” worried about the “healthy” correction that has been running of late. Commerce secretary Howard Lutnick echoed that, noting earlier this month that the performance of the stock market is not the “driving force” behind the president’s tariff policy.
As analysts at Barclays diplomatically put it, “Trump and his administration have expressed more tolerance for adverse economic fallout from tariffs than we had expected.”
Those waiting for a “put” here — the point in the market at which the president has a change of heart and backtracks — are creeping to the horrible realisation that they got this wrong. “Where has the put gone?” asked the multi-asset team at HSBC.
To bring it back in play, they said, one of a few things needs to happen: a lasting seize-up in the flow of fresh public debt or equity into the world; an outbreak of stress in the deepest plumbing of the financial system; or a global and disorderly collapse in risky assets. None of these is happening yet — the drop in US stocks has not fully infected Europe, for example, and the market moves have been orderly, if unpleasant.
One related item to add to that list is a bond shock. Right now, Treasuries are broadly calm and in balance — supported by the rising chance of a US economic slowdown but also held down by lingering concerns over fiscal incontinence and nascent worries over the dollar’s reserve-currency status. If something were to break in either direction there, the administration would be more likely to respond.
Bond vigilantes — the original and best — still beat their newbie counterparts in stocks any day of the week.
https://www.ft.com/content/0ba1d479-ab3d-4e1b-887f-09cde0a44fb0
