Did the market win against Trump this time? Don't celebrate too early

Trump's Sudden Concession: Did the Market Really Win?

On Thursday, April 24, James Mackintosh, a senior market columnist for The Wall Street Journal, stated that it is still uncertain whether Trump's policy shift was due to market reasons.

As a real-time opinion poll of capital, the market does have some influence on Trump, but he is not focused on any specific indicator (such as the 30-year U.S. Treasury yield approaching 5%); rather, he is concerned about the simultaneous decline of stocks, bonds, and the dollar, which usually indicates a massive capital outflow from the U.S., a situation that any government would find difficult to bear.

Historically, the fiscal crisis in the UK in 1976 proved this point, where the collapse of the stock market, bonds, and the pound ultimately forced the government to seek assistance from the International Monetary Fund to stabilize the situation.

However, Trump's attack on the independence of the Federal Reserve could harm the market, yet he still proceeded, indicating that he can withstand significant risks before changing policy. Investors should not assume they can control presidential decisions and must remain cautious to avoid overconfidence.

Investors Should Not Be Overconfident

From a timing perspective, Trump's decisions seem closely related to the market. On Tuesday and Wednesday, U.S. stocks and the dollar rose, while Treasury yields and gold fell. The turning point for all this was Trump's statement that he would not fire Powell and the optimistic sentiment regarding trade tensions, which seemed to indicate that Trump had made a concession, temporarily halting the sell-off of U.S. assets.

This policy shift easily recalls the situation two weeks ago when the dollar fell to a three-year low. Despite a significant rise in Treasury yields, gold reached a new high. After signs of severe turmoil in the financial markets, Trump postponed the so-called reciprocal tariffs. The market clearly did not favor Trump's comments on the Federal Reserve and tariff policies, and Trump was also displeased with the market's reaction.

In reality, the market is not a mysterious force but a collective judgment of investors regarding the economic outlook, a real-time opinion poll of capital. Sometimes, policies beneficial to the country may be detrimental to U.S. stocks, bonds, and the dollar, but when stocks, bonds, and the dollar all decline simultaneously, it usually indicates that capital is flowing out of the country, a situation that any government, including Trump's, would find difficult to bear.

History has repeatedly proven this, such as the fiscal crisis faced by the UK in 1976, which is a typical case where the country's stock market, bonds, and the pound collapsed simultaneously, stabilizing only after the government sought help from the International Monetary Fund. Countries that ignore capital outflows ultimately fall into isolation and poverty, like Venezuela or Zimbabwe.

James Mackintosh stated that from this perspective, the market seems to have an influence on Trump, to some extent "restraining" his decisions, but investors still need to be vigilant about three major issues.

First, Trump will not set a "bottom line" for asset prices to prevent market prices from falling further. In reality, the key to Trump's policy shift is not any specific indicator, such as the S&P 500 index falling to 4,835 points, the ICE dollar index dropping below 100, or the 30-year Treasury yield approaching 5%. What could truly prompt him to change his approach is a significant capital outflow from the U.S.Secondly, Trump's previous attacks on the independence of the Federal Reserve could harm the market, but he still did it, which indicates that he can bear significant risks before changing policies. This is not good news for investors, as market prices may need to drop significantly before Trump adjusts his policies, and investors may have to endure considerable losses before that.

Finally, it is still uncertain whether Trump's change in policy direction is due to market reasons. Perhaps next time he will listen to other advisors' suggestions, or suddenly have a new idea, leading to different decisions. Investors should not assume they can control presidential decisions; they need to remain cautious and avoid overconfidence.