With Congress acquiescing to all of Trump’s wishes and the courts stacked in his favor, many are concerned about an unbridled president. To the rescue comes the market.
By Sergei Klebnikov and Matt Schifrin, Forbes Staff
This past Thursday, President Trump did it again–and so did the financial markets. In a Truth Social post, Trump said that he would be carrying through next week on his previously delayed threat to slap 25% tariffs on Canadian and Mexican goods because (he said) these neighbors weren’t doing enough to stop drugs at the border. Then, in the oval office later, he said China would get hit with an additional 10% levy—taking the total to 20%. The market’s response was swift and unambiguous. The S&P 500 closed down 1.6% for the day, taking it into negative territory for 2025, while the tech-heavy NASDAQ closed down 2.8%, off 3.8% for this year.
What the erratic 47th President will do next week is an open question. But investors can at least be sure, based on his performance both during his last term and this one, that Trump is paying attention to the market. On February 1, after he initially signed three executive orders declaring these tariffs, stocks plummeted the next morning. They recovered a few days later after Trump “paused” what a majority of economists view as an ill-conceived proposal.
A failure of checks and balances. A strongman presidency. Constitutional crisis. After just a few weeks in office, these are the words echoing in the halls of power as President Trump and Elon Musk steamroll through federal agencies. So far, there’s no pushback from a Republican controlled Congress and it’s unclear if the judiciary will intervene. Given his fake news rhetoric, Trump is certainly not worried about media reports, traditionally a strong external check on presidential power. After all, his own supporters don’t trust the mainstream media.
But there is one authority that President Trump seems to recognize: the market.
“Trump is a president who has more closely aligned his own success with the stock market than any other president in US history,” says Jeremy Siegel, a Wharton emeritus professor and WisdomTree senior economist. “The market is the ultimate check, especially for a president who cares.”
While stocks surged higher following Trump’s reelection in November, cracks have now started to emerge in the rally. Along with stocks, Bitcoin prices have retreated 20% from their Trump-infused highs.
During Trump’s first term, his announcement of 25% tariffs on China in March 2018 caused markets to tank nearly 5% in a week. While that escalated into an all out trade war with China in 2019, by 2020 Trump backed down and signed a trade agreement.
“It is instructive that in the trade war in his first term, Trump was willing and able to pivot when the economic damage caused by that war became apparent, easing tensions with the Chinese,” wrote Moody’s chief economist Mark Zandi in a recent report. “We expect a similar dynamic this time as well.”
Growing up in Queens, New York–and for decades seeking the approval of Manhattan’s market rich elite–Trump has many Wall Street billionaires within his inner circle. So it is hardly any surprise that he has always been highly sensitive and attuned to financial markets and their movements. In December, Trump triumphantly rang the opening bell at the New York Stock Exchange while standing in front of his 2024 Time “Person of the Year” cover. (It was his first time ringing the bell, and he brought along his children and Vice-President Elect J.D. Vance for the occasion.)
The bond market may be an even more important check than the stock market for Trump, especially considering that the nation’s $36 trillion in debt needs continual refinancing. There is no greater cautionary tale than the experience of short-lived British Prime Minister Liz Truss. After taking office in September 2022, she boldly announced she would slash taxes and ramp up borrowing. This widespread fear over inflation and mounting debt quickly caused bond prices to plummet, sending yields sky high as the British pound plunged to a record low against the U.S. Dollar. With several pension funds on the brink of default, the Bank of England had to announce three emergency interventions to save the bond market. Within three weeks, Truss had scrapped her tax cutting plan and resigned.
While the prospect of a United States President resigning over a drubbing by the capital markets is farfetched, Truss’ implosion is instructive. Bond vigilantes are likely to keep President Trump on his toes. Things like the adherence to the rule of law matter a lot to the entities that buy and hold United States government paper.
In terms of interest rates, 10-year Treasury yields have come down since Trump assumed office from about 4.8% to around 4.2% today. However, mortgage rates (and inflation) remain problematic. According to Freddie Mac, 30-year fixed home mortgage rates, which recently rose above 7%, are hovering around 6.76% today.
Right now the Trump administration is riding on the coattails of the Biden Administration’s strong economy, which averaged about 3.6% GDP growth from 2021 through 2024. That compares to Trump’s 1.5% average annual GDP growth during his first term.
The test will come if President Trump encounters a real crisis, not of his own making, like the Financial Crisis of 2008, which occurred at the end of President George W. Bush’s second term. As is often the case during times of economic turmoil, the market guided the nation’s leadership. When the House of Representatives in 2008 voted down the $700 billion Troubled Asset Relief Program (TARP) bailout on September 29, the S&P 500 plunged nearly 9% in four days before members of the House reconsidered the plan and approved the bill on October 3.
During Trump’s first term he tried to downplay the Covid 19 pandemic but the global shutdown, and a stock market plummeting more than 30% in a matter of weeks, jolted his administration and Congress into action. The result was $5 trillion in stimulus over two years, that buoyed markets then and ever since.