The first 100 days of Trump: A stress test for US market optimism

The media is full of reports and articles analysing the Donald Trump administration as it completed 100 days in office. The levels of volatility and daily market-moving posts on social media have been unprecedented. Mr Trump has signed the highest number of executive orders in the first 100 days of any US administration in history. If one were to take a step back and look at the first 100 days of Trump 2.0, some broad trends become clear.

 

The biggest theme has undoubtedly been the unveiling of new thinking towards trade and tariffs. We have moved to the highest tariffs in the US since the late 1930s.  Even assuming we end up with a 10 per cent general tariff on everyone and somewhere near 60 per cent on China, along with some sector-specific rates and exemptions, the ratio of duties collected to total trade will be about 15 per cent, compared to 2.5 per cent in pre-Trump era. This will fundamentally alter trade and force supply chain reorganisation.

 

As for the markets in the first 100 days, the breakout performance has been in gold. It has hit all-time highs and is up more than 20 per cent. European equities are the next best, with the German market gaining more than 15 per cent in dollar terms, followed by the Hang Seng in Hong Kong and the broad Euro Stoxx 600, both rising by 10 per cent. The worst performers are oil, down almost 20 per cent, and the Magnificent Seven (Mag7), down 15 per cent, followed by the Nasdaq at minus 10 per cent.

 

The other standout has been the US dollar. This has been the worst 100-day dollar performance following an inauguration since daily data became available in 1969. In terms of the economy, we have seen a tanking of both consumer and corporate confidence, and almost every forward-looking indicator of the US economy is worsening rapidly. The current hard data on employment and orders is still strong, but the prediction markets now have the odds of a US recession in 2025 at more than 60 per cent.

 

The initial readout on DOGE seems to be a disappointment. There is no discernible improvement visible in the daily fiscal outlays, as many have highlighted, and the cuts in spending of $160 billion seem overstated. Most nonpartisan commentators believe the actual savings are more in the range of $60-70 billion — not zero, but not consequential either.

 

Given all the chaos surrounding Liberation Day, the market volatility, and doom and gloom, one would have thought that investors had given up on the US! The tone of some of the commentary seemed to suggest that the US had become a basket case and was uninvestable. The facts are, however, different. Surprising as it may seem, given the bearishness of most, markets have come back entirely since the initial declines of Liberation Day. The 10-year US treasury yields are now back to the same levels they were before the April 2 fireworks. So much for the theory that who will buy US bonds. In fact, this is the second-best 100-day performance for bond yields following an inauguration. The Nasdaq, after being in bear market territory, has also gone higher than its April 2 levels, with the S&P 500 not far behind. The only asset significantly lower post-Liberation day is the dollar, reinforcing the thought that we may have seen a dollar peak for the time being.

 

The message from the markets is quite different from the bearish commentary. Both US equities and bonds are higher than they were before the Liberation Day announcements. I find this quite astonishing. There are some clear long-term trends and it is hard to understand why markets seem so indifferent.

 

One clear trend is a rebalancing of portfolios, with money on the margin leaving the US. Over the last 15 years, the US has outperformed every other market and thus it has sucked in capital from all over the world. Over the last decade, the S&P 500 delivered returns of 15 per cent compounded, compared to 7 per cent for world equities (ex US). The US reached 70 per cent weighting in global equity indices. On some estimates, almost $20 trillion of capital has been sucked into US financial markets. This is now reversing. Capital on the margin will move out of the US. This thinking is already visible in discussions with global allocators. They recognise they have too much money in American assets, and with a weakening dollar, Mr Trump’s policies, and initial signs of relative US underperformance, the catalyst to begin this rebalancing is now here.

 

Second, it is obvious that the Trump tariffs, wherever they ultimately land, will hurt US profitability. Outsourcing has been led by US corporations; they are the masters of moving the capital-intensive manufacturing piece overseas to China and white-collar services to India. The only reason to offshore is to lower costs. Given a choice, it is always easier to have your employees and manufacturing next to you. Offshoring brings complexity to supply chains and is only done if costs can be brought down by 15-20 per cent at a minimum. If the endgame of these tariffs is to bring more manufacturing back to the US, it will affect corporate margins, as it is more expensive to do the job in the US — the reason it was offshored in the first place. Every company cannot pass on the higher costs. US corporate margins are near all-time highs, with return on equity above 16 per cent; both will go lower in the coming years. I do not see this being reflected in out-year earnings estimates. Earnings estimates will have to be cut.

 

Third, there is a genuine risk of a stagflationary environment for the US: Inflation higher than current estimates and growth lower. A stagflation-type of environment with higher rates and lower growth is toxic for equities. At a minimum, the odds of a recession in the US have gone up significantly. In a normal recession, earnings get cut by 15-20 per cent, and markets take a commensurate hit. This is not even remotely in the forecasts of most market players today. Given the bounceback  post-Liberation Day, markets do not seem priced for an upcoming recession. Markets may be looking through any upcoming recession as being very short-term or expecting the Federal Reserve to ride to the rescue, but to me, it smacks of complacency.

 

Fourth, India will never again get such a chance to integrate into established global supply chains. The Trump tariffs are going to force companies to move away from China. The reality is that, absent the geopolitical stress, a multinational corporation like Apple would never have thought of moving its supply chain out of China. It has a cost structure, scale, and capability that no other location can match. We missed the bus 25 years ago as these supply chains were established after China joined the World Trade Organization. We are being given another chance. We cannot miss the bus again.

 

I am genuinely surprised how easily the markets have shrugged off the policy chaos of Trump 2.0. There seems to be a belief that nothing will ever dent the ability of US financial markets to outperform. This belief is about to be seriously stress-tested.

     

  The author is with Amansa Capital