It’s not all Trump’s fault

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 policies 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 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 recent surge in spending figures may be attributed to the combination of cold weather and fires. January tends to bring about unusual events, as seen in the PCE chart for January 2024 and 2023.

While the market appears to be reacting to various policies, it seems more like a correction of the exaggerated Trump trades from the previous year rather than a deeper shift. The fluctuation in small-cap stocks, previously favored under the “Trump will boost domestic growth” narrative, exemplifies this trend.

Moreover, the recent decline in the big tech stocks, known as the Magnificent 7, does not appear to be a direct response to Trump’s policies. Instead, it seems to be a natural correction following a period of significant growth, indicating a broader market correction beyond just these stocks.

It’s essential to look beyond the Trump administration when analyzing market trends and economic developments. The question remains whether US risk assets can return to a more stable state after years of extraordinary post-pandemic growth.

For further insights into the market landscape, check out the FT Unhedged podcast for a deep dive into the latest financial news. Additionally, explore the recommended newsletters, such as Due Diligence for corporate finance updates and Free Lunch for global economic policy discussions. sentence using different words:

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