Volatility has dropped to a year-to-date low, and investors are becoming increasingly calm about the threat of Trump's tariffs
Despite a series of new trade threats issued by Trump this week, the market remains calm. The VIX index, which measures the short-term expected volatility of the S&P 500, has fallen to 16, well below the long-term average level of around 20. Some investors are beginning to worry that the market is pricing in a certain degree of complacency
Market volatility has fallen to its lowest level of the year, and the U.S. stock market has reached an all-time high, despite Trump escalating trade threats this week. Investor concerns about tariffs are dissipating.
The VIX index, which measures short-term expected volatility of the S&P 500, has dropped to 16, well below the long-term average of around 20. A similar index for expected volatility in the U.S. Treasury market is also close to its lowest level in three years. Meanwhile, Nvidia's market capitalization surpassed an unprecedented $4 trillion on Wednesday, leading a surge in tech stocks.
Despite Trump issuing a series of new trade threats this week, the market remains calm. Investors are now taking Trump's current threats far less seriously than his earlier remarks, betting that the president will ultimately back down on tariffs that could severely harm U.S. growth. This trading strategy is known in the market as "TACO," which stands for "Trump Always Chickens Out."
Max Kettner, HSBC's head of multi-asset strategy, stated:
"I no longer care about tariffs; it's all self-imposed. What can stop them from saying, let's give it another three months?"
The "Trump Put Option" Effect Emerges
A key turning point in investor attitudes toward tariff threats was May 12. According to CCTV News, starting from 12:01 PM on May 14, China implemented adjustments to tariffs on imported goods originating from the U.S., reducing the rate from 34% to 10%, and suspending the implementation of a 24% tariff on U.S. goods for 90 days.
Kettner remarked:
"After May 12, that was a significant game changer. We realized there was a Trump put option."
Trump's latest tariff measures have brought them closer to some analysts' expectations. Those initially termed "reciprocal" tariffs were later postponed and renegotiated after a stock market crash, and Trump subsequently delayed the deadline for implementing tariffs from July 9 to August. According to CCTV News, President Trump stated on July 7 that starting August 1, tariffs ranging from 25% to 40% would be imposed on imports from 14 countries, including Japan and South Korea.
According to CCTV reports, Trump threatened to impose a 50% tariff on Brazil. However, in the currency market, the expected volatility index for the euro against the dollar from the CME Group has significantly decreased from its April peak, roughly returning to the trading levels seen at the beginning of the year At the same time, Goldman Sachs, JP Morgan, Barclays, Citigroup, and Deutsche Bank collectively optimistic about the U.S. stock market. Goldman Sachs raised its year-end target for the S&P 500 index from 6,100 points to 6,600 points, with the main drivers of the upward revision stemming from the judgment that the Federal Reserve will cut interest rates earlier, the subsequent decline in U.S. Treasury yields, and the continued strong performance of large U.S. companies. The market generally expects that the upcoming second-quarter earnings season will deliver solid results.
Risk Warnings Amid Market Optimism
Despite the popularity of the "TACO trading" strategy, some investors warn that the optimism in the stock market itself may encourage Trump to be more aggressive on trade issues than the market currently expects.
Lee Hardman, a senior currency analyst at MUFG Bank, stated: "There is a view that the Trump administration is unlikely to want to replicate the chaos caused by tariffs in early April."
However, he also warned:
"With U.S. stocks hitting all-time highs and the budget passing, Trump may be emboldened to take a tougher stance on tariffs than expected."
Some investors are more concerned that the market is pricing in a certain degree of complacency. The S&P 500 index is close to historical highs, trading at a forward price-to-earnings ratio of 24 times. Both the UK and German stock indices are at historical peaks.
Kasper Elmgreen, Chief Investment Officer for Equities and Fixed Income at Nordea Asset Management, stated:
"My concern is that there is not much of a safety margin in valuations right now. We have experienced the largest increase in tariffs in anyone's memory, but the market has taken a very relaxed view of the potential impact. What worries me is the lack of concern."
