What the markets seem to suggest about Trump, tariffs, and optimism

When American President Donald Trump detonated a trade bomb on April 2, global markets shuddered. The levies, set to bite from April 9, targeted countries with a 10 per cent baseline tariff and a punitive 145 per cent on Chinese goods. Stocks tumbled for four days as investors braced for chaos. Yet, days later, Mr Trump halted the tariffs for 90 days — excluding those on China — and exempted electronics, triggering a relief rally. Interestingly, that “relief rally” has now morphed into a full-fledged bull market in some countries. The German market has hit a lifetime high. Even though the United States (US) is supposedly facing the prospect of empty shelves in a few weeks, the S&P 500 has recorded nine continuous days of positive closing, its longest winning streak in 20 years! On Friday it closed at 5,686 — above its pre-tariff level. The Indian markets brushed off the drama, climbing 3.5 per cent in April. 

The exuberance is perplexing. Tariffs, after all, are taxes by another name, inflating the cost of imports. Yale University’s Budget Lab estimates the 2025 tariffs will lift US consumer prices by 2.3 per cent, costing households $3,800 annually (in 2024 dollars). Car prices could rise $2,000-10,000 and iPhones 40 per cent. And groceries will not be spared. The International Monetary Fund, citing the tariffs, slashed its 2025 US growth forecast from 2.7 per cent to 1.8 per cent and estimated the global recession risk at 60 per cent, up from 40 per cent. US GDP growth may shrink by 90 basis points in 2025, with businesses facing higher input costs, squeezed margins, and potential layoffs. Global supply chains, already fragile, risk further disruption, while retaliatory measures threaten American exporters — farmers and manufacturers in rural heartlands stand to lose most, as they did in the 2019 trade war.

  The dire prospects are reflected in the consumers’ expectations index — based on consumers’ short-term outlook for income, business, and labour market conditions — which dropped 12.5 points to 54.4, the lowest since October 2011, and well below the threshold of 80, which usually signals a possible recession. In short, there is no upside to Mr Trump’s tariff tantrums, only a downside — higher consumer prices, slower growth, potential recession, disrupted supply chains, retaliatory trade barriers, market volatility, and strained alliances. And yet, investors have been remarkably high-spirited, as if whistling in the park on a sunny spring morning. What gives?

  I believe in paying attention to sustained market moves because that is an objective reality, collectively shaped by the wisdom of the crowds. By contrast, narrative is subjective and based on cherry-picked data or incidents. So, what is the message that the market is sending us? The obvious initial driver of market gains has been Mr Trump’s announcement on the 90-day pause on “reciprocal” tariffs for most countries, excluding China. This sparked a massive market rally, with the S&P 500 soaring 9.5 per cent — its third-best day since 1940 — and the Nasdaq jumping 12.2 per cent. I suspect that since that day investors may be calling the President’s bluff. After all, the precedent from the 2018-19 US-China trade war suggests that markets can recover quickly once tariff uncertainties subside. Investors now appear to be wagering that this trade war, too, will end in an eleventh-hour compromise.

  Curiously, this bet is being placed not by the usual suspects on Wall Street but by retail investors. While institutions have sold off through April, retail investors have been buying the dip — apparently unfazed by tariff headlines. If the markets are right, this could mark a rare moment in which mom-and-pop investors outplayed the professionals. The economic data lends some credence to their optimism: April saw 177,000 new jobs and the inflation rate cooled to 2.4 per cent in March, below forecasts of 2.6 per cent. In India, a weakening dollar against the rupee lured foreign investors back while domestic funds, now outstripping their foreign counterparts in holdings, kept buying.

  A more cynical view may be legal, not economic. Mr Trump’s second-term agenda is under siege in courts. Over 200 lawsuits have been filed, challenging a range of executive actions, with 70 federal rulings — on issues from immigration to federal spending — thwarting his plans. The Supreme Court has already blocked deportations under the Alien Enemies Act, and Mr Trump’s use of the 1977 International Emergency Economic Powers Act to impose tariffs may yet be struck down as illegal. If the courts agree, many of Mr Trump’s most disruptive policies may be rolled back or neutered, restoring a semblance of stability. If judicial challenges neuter his policies, it would mean a swing back to “Biden’s stock market”, implying stability or growth without Mr Trump’s disruptive policies. In the end, the markets may be messaging less about trade policy and more about Mr Trump himself. If the President has his way, the current cheerful optimism may turn out to be reckless. But if, as it appears, investors believe the President would be constrained — by courts, by Congress, or by his own volatility — then his threats may not matter. Tariffs, in that case, are noise. The signal is elsewhere.

The writer is editor of www.moneylife.in and a  trustee of the Moneylife Foundation; @Moneylifers