Don’t Count On A Trump ‘Put’…
President Trump and several of his senior cabinet officials were hitting the media circuit aggressively over the past week, which I could only interpret as a full court press to get in front of the narrative through the lens that they want the public to hear. Below is a snippet of Treasury Secretary Scott Bessant being interviewed on CNBC:
Regarding the economy (emphasis our own):
Andrew Ross Sorkin:
“As an investor who used to spend their days investing in various assets, do you look at the 10-year Treasury yield, WTI crude prices, and other economic indicators and say,"This is the work of the government and a newfound confidence in the economy," or do you see it as a concern for what’s to come?”
Scott Bessent:
“Well, I think it’s both. We could be facing the worst of all worlds. This isn’t new to me—I’ve been saying it for six or nine months now. The Biden Administration, in my view, has created an economic imbalance. To address Joe’s question about working Americans and the American dream, I believe the [Biden] administration has fostered a bad equilibrium.Right now, the top 10% of Americans—most of the people in this room and many watching this show—account for 40-50% of total consumption. That is an unstable economic structure. Meanwhile, the bottom 50% of working Americans have been struggling. We are trying to address this issue and lower interest rates, but is the economy we inherited beginning to slow down? Possibly. There will be a natural adjustment as we transition from public spending to private spending. The market and the economy have become addicted to government spending, and there will be a necessary "detox period" as we shift away from that reliance.”
Becky Quick:
“This transition will likely bring temporary pain, something both you and the president have acknowledged. The real question is whether this temporary pain is the new version of "transitory inflation." How do we know that we will successfully navigate to the other side of this adjustment, and how long will it take?”Scott Bessent:
“Well, there is an adjustment period, and we will have to wait and see whether that adjustment brings real pain.”
Regarding the stock market (emphasis our own):
Joe Kernen:
“When it comes to the president paying attention to the stock market or the equities market, there has been speculation about how much weight he gives to market performance. In the past, we believed that President Trump gauged his success, at least in part, by the stock market's performance. However, this time around, he doesn’t need to be reelected in four years. The market has risen 20% over the last two years, so is there any sense that he’s "playing with house money"? He has made that remark in the past. I guess what I’m getting at is this: at what level on the S&P 500 would we need to see for it to influence his policymaking decisions?”
Scott Bessent:
“Well, President Trump absorbs a lot of information daily, and the stock market is certainly part of it. As someone who was on the other side of investing for a long time, I know how people look for signals—such as the so-called "Trump put" that some believe exists. But there’s no Trump put. His perspective is that if good policies are in place, the markets will naturally go up.”
President Trump followed with similar sentiments when interviewed by Maria Bartiromo on Sunday, where he was asked whether he was expecting a recession this year: “I hate to predict things like that. There is a period of transition because what we’re doing is very big.” Whether it be President Trump, Commerce Secretary Lutnick, manufacturing czar Peter Navarro, NEC Director Kevin Hasset, or Treasury Secretary Scott Bessant, all of them are singing a similar tune: their policies are aimed at transitioning a U.S. economy that has worked for the few at the expense of the many. At the same time, they are acknowledging that going from point A to point B will incur some turbulence, as Trump pointed out during his March 4th address to Congress: “There will be a little disturbance, but we’re okay with that.”
The common refrain for interpreting President Trump during his first term was to ‘take him seriously, but not literally’ – this doesn’t appear to be the right approach in this second term. When Treasury Secretary Bessant claims the economy is about to go through “a detox period” and the President repeatedly highlights that a “period of transition” is upon us, perhaps we should also take him literally. Detox involves a change in habits (think in terms of the post-COVID era of excessive government spending), and transition, by definition, means a shift from one state to another.
This is the closest thing to honesty you will ever get out of Washington, and it looks like the White House realizes that disruption is going to wreak havoc on the economy. Reagan had a recession early on and so did George W. Bush, but both still got re-elected – so perhaps there is something to be said about getting it done and over with (but not have the downturn last long enough that memories don’t fade in the leadup to next year’s midterms).
The sequence of this administration's policy transition is triggering adverse reactions across financial markets, and the near-unprecedented levels of U.S. policy uncertainty are starting to seep into economic results. Imagine for a moment that you have an industry that is 25% of GDP and it is aggressively cutting spending, investment, and employment… but the magnitude, pace, timing, and details of those cuts were unknown. In such a scenario, it's likely that every worker in that 25% of GDP would be riddled with uncertainty and, as a result, begin to slow their purchases while likely trying to increase savings. Furthermore, every supplier in and out of this industry might adopt similar habits, and investors evaluating the situation would likely question the future investment merits of both this industry and the economy at large. We are now seeing policy uncertainty symptoms creating stasis across trade partners, executives, and households.
The policy uncertainty emanating from this administration is not just on the trade front. We have the debt limit set to return to the limelight where House Republican Jason Smith – chairman of the Ways and Means Committee – projected that the US could hit its borrowing limit by mid-May, depending on tax revenue. The timing of when the debt limit is reached is amplified by President Trump’s reported plan to slash up to half of the IRS workforce by year-end, potentially undermining revenue collection and pulling forward a potential U.S. default. Without intervention, the consensus among Wall Street is that the government could exhaust its borrowing capacity in or around August. The U.S. Treasury has yet to issue a default projection, but fiscal uncertainty remains a pressing concern.
Further compounding matters, Congress is debating spending cuts proposed by the Department of Government Efficiency. Republican lawmakers are considering rescinding up to $100 billion in government spending – potentially offsetting revenue shortfalls but adding legislative complexity. Senator Rand Paul has emphasized the need for congressional involvement, urging Musk and the White House to submit a formal proposal for DOGE spending cuts. President Trump’s strategy hinges on believing short-term pain will yield long-term economic gains. His policies aim to revive manufacturing and onshore production while reducing government expenditures. However, market volatility, falling Treasury yields, and fiscal uncertainty raise the specter of economic stagnation. If tax revenue falls short and the Debt Limit crisis escalates, the administration may have to recalibrate.
To be fair, the pre-conditions coming into Trump’s second term are not entirely of his doing (I understand how convenient it can be to blame Trump for all that ails the U.S. economy, but we’re talking about decades of broadening imbalances that have gone unchecked), and while if things go wrong he’ll likely shoulder all the blame – in reality his policies will have served as a spark to a setup that many a public servants are already on record in calling it unsustainable. This administration's economic policies represent a high-stakes gamble on the structural transition of the U.S. economy from paradigm A – a buoyant-but-K-shaped U.S. economy propped up by excessive government spending–to paradigm B—a buoyant-more-balanced-main-street economy that shifts the burden of generating marginal economic output back to the private sector. The Trump administration is banking on temporary economic disruptions leading to long-term economic resilience.
However, investors need to be aware of a significant risk to U.S. assets if this administration's view on restructuring U.S. trade policy succeeds. Below is a thread from X that does one of the best jobs at simplifying a complex international accounting identity regarding trade deficits and capital flows. I don’t mean to stress your mind with this concept, but it’s a major factor driving structural market dynamics (along with passive flows) and should it reverse at the margin or in large part, then investors are looking at a significant shift in the investment landscape from what existed over the past three decades:
Look, I know I’m hitting on some dense and complicated topics in this week’s missive, and more times than not when I participate in a presentation where the base case is regime change or that a structural dynamic that has been at play for three decades is about to reverse – I listen with interest and curiosity then go one about the rest of my day. This is because, more times than not, such a prediction isn’t actionable because it lacks a timing element. I’m not saying that timing is upon us, but I will readily admit that I’m giving more consideration to these concepts and the potential for impactful structural change than I have at any time in the past decade.
Suppose we are, in fact, setting the stage for an unwind of “U.S. Exceptionalism” where U.S. assets became the savings vehicle for excess savings around the world. In that case, if foreign investors decide that their capital is better served somewhere other than the U.S. (be it a weakening dollar, change in trade policy, lower relative interest rates, higher inflation, declining equity market…) we are talking about a monumental shift in capital flows that isn’t over after a 10% correction in U.S. equities.
As for the equity market, it is overdue for an oversold bounce, but a lot of damage has been done, with the bull camp now having a lot to prove. The S&P 500 notched its third consecutive week of losses, dropping -3.1 % last week – its sharpest weekly decline since early September. All 11 sectors of the S&P 500 except Health Care stocks ended the week in the red, with Financials and Consumer Discretionary stocks joining Tech among some of the worst performers. The Nasdaq Composite got walloped by -5.8%, and the index that is most correlated with the economy, the small-cap Russell 2000, registered a weekly decline of just over -4.0% (down -15.0% from the nearby post-election peak).
As I type, the Mag7 has almost reached a 15% decline from its all-time high. It’s reaching oversold levels we haven’t seen since this bull market rally began at the end of 2022.
The S&P 500 is also at extremely oversold levels and in the process of seeing its 50-day moving average cross below its 100-day moving average. Keep in mind the last leg of this bull run that really sent it into overdrive in late 2023 happened after a positive inflection in the 50dma pushing above the 100dma.
What we’re seeing in the major averages is troublesome not just on a technical basis but also at a fundamental level. It's best to simplify the equation as much as possible when things get complicated. With this in mind, if this bull market is ending, then we are looking at a gigantic hit to consumer spending via a depressed wealth effect. Consumption is now dominated by the wealthiest 10% of Americans, who make up nearly half the spending pie and own half the stock market, worth $23 trillion. We have already lost the low-end and middle-class consumers, so if the stock market causes the high-end to pull back, we will be in for the mother of all consumer-led recessions. In any event, nobody should be separating Wall Street and Main Street any longer because with U.S. households now having their balance sheet comprising a near-record share of over 70% in equities, both Streets are joined at the hip.
Beyond potentially losing the wealth effect, we’re losing the tailwind of fiscal policy as this administration takes its ‘chainsaw’ to government spending. Recall that it was the massive expansion in fiscal policy over the past four years that lent support to an economy that had to overcome the most aggressive monetary tightening (2022 – 2023) since the Volker era in the early 1980s. Over the past four years, the accumulated government deficit reached a whopping -$8 trillion. The combination of the impact of the wealth effect from asset inflation and the lingering effects of the blowout in fiscal stimulus checks from Uncle Sam allowed for a -$3 trillion drawdown in personal savings in support of consumption.
That amounted to $11 trillion of support to the economy, but all GDP did (in nominal terms) was expand +$8 trillion. So, net of these effects from the government and the savings withdrawal, a recession indeed would have reared its ugly head. Now that these crutches are being removed, it will be interesting to see what happens since so few investors are positioned for a deep and protracted equity bear market or, worse, an outright recession.
I know I’ve poured it on pretty heavy in terms of the negative, but we do have some positive offsets coming into view: oil prices have moved handily below $70/bbl and are back to levels last seen in 2021. Interest rates and the dollar are in clear downtrends. However, I’m not sure I see them moving meaningfully lower from here unless the economy and equity market worsen dramatically. We are finally getting a thorough cleansing in exuberant and euphoric investor sentiment and positioning – this is a positive development for contrarians. The biggest question on investors' minds is where we find our first level of support, and patient buyers step in because they see an opportunity. My guess is we’re getting close in this 5,600 – 5,400 area in the S&P 500, but I still don’t think we’re in a market where a V-shaped bottom sets the low, and then we’re back off to the races. Things have changed; the sooner you acknowledge that as an investor, the better.
Transitioning the trillions of dollars of legacy positioning across asset markets associated with paradigm A to paradigm B likely requires a significant adjustment. How much of that adjustment has been completed thus far remains to be seen. Some investors making bold bets today regarding the path and outcome may be proven right. But those exhibiting more restraint and caution would be remiss to conflate luck with actual skill. No amount of skill can perfectly trade a distribution of probable economic outcomes this historically wide. Let the chart below be a reminder of how difficult it can be at times to trade around and position for potential regime changes. This chart plots the returns of various markets from one week following Trumps victory (11/12/24), do you recall anyone banging the table to buy the German Dax +21%, the Hang Seng +19%, gold +12%, the French CAC +11%, while the U.S. dollar index is down 1%, the Nasdaq Composite is down 7%, and the S&P 500 is down 6%.
Yeah, I didn’t either, and outside of gold, short-term treasuries, and cash, I wasn't making the case that foreign markets were set to outperform U.S. equities. Mr. Market humbles us all. Nevertheless, when markets talk, it's important to pay attention and listen.
So, what’s an investor to do? Stay disciplined, be patient, and recognize that you don’t need to recover all your losses tomorrow. Moreover, understand your time frame and let longer-term time horizons work to your benefit, in both keeping you patient with fundamentally strong investments that are getting taken down in a weak tape and giving you confidence to take advantage of opportunities that may or may not work out well in the near-term, but are likely to in the long-term. Don’t wait on a Trump put or a reversal in his policies. It’s unlikely to come, and even if it did, this administration would lose all credibility. As for the Fed, their hands are tied for the time being with inflation running above its target and the labor market not showing enough weakness for it to support that side of its mandate. I guess I’m saying that the Fed put is lower and likely to be too late to matter in staving off a negative feedback loop.
Bottom line, we have a toxic cocktail on our hands at the moment, and it won’t sort itself out overnight. Trying to trade this messy chop is a fool's errand even for the most skilled professionals. The best I can advise is to get yourself in a position that gives you the confidence to not do something stupid, pick your spots, adapt, don’t be afraid to change your mind, and be patient. No one is going to nail it, including you. Nothing wrong with living to fight another day.
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