(BOE Report) – If record-high U.S. stock prices accurately reflect investors’ assessment of the first year of Trump 2.0, then it’s a glowing scorecard for the most interventionist government in decades.
It’s yet another example of the topsy-turvy economic world where the global norms and orthodoxies of the last 40 years are being questioned and sometimes discarded by the U.S. president – who is rapidly becoming the market activist-in-chief.
Under Donald Trump’s direction, the U.S. government has taken direct equity stakes in companies, called for the firing of CEOs, attempted to dictate CEO compensation, ensured the government cuts from Big Tech chip exports, and sought to fire Federal Reserve officials.
On top of that, Trump has ordered the purchase of $200 billion of mortgage-backed securities, directed U.S. oil companies’ activities in Venezuela, tried to ban defense firms from buying back shares unless they speed up production, and called for a one-year cap on all credit card interest rates as his Justice Department has threatened to indict Fed Chair Jerome Powell. And that’s just in the past week.
INEFFICIENT MARKET HYPOTHESIS?
Consider an alternate reality in which Kamala Harris won the 2024 U.S. presidential election and was now approaching her first year in office, having pursued a similarly controversial clutch of unorthodox policies. Would markets be shrugging this off so easily?
We will never know, but it’s reasonable to assume that there would have been notable pushback from investors.
In the real world, apart from the brief turmoil following Trump’s “Liberation Day” tariff announcement in April, there has been virtually none.
Indeed, last year was a record year for stocks and many other asset classes. Hedge funds – no friend of government meddling in the free market and private sector – saw assets under management soar above $5 trillion, as they recorded their best year since 2009, according to HFR.
William Henagan, research fellow at the Council on Foreign Relations, agrees it’s something of a “conundrum” that the Trump administration’s highly interventionist approach to Wall Street and Main Street hasn’t triggered more lasting damage to public markets.
“Investors don’t necessarily see the series of market interventions as substantively eroding the rule of law and property rights that underpin financial markets and the economic system,” Henagan says.
“Perhaps public markets are not all-seeing, all-knowing, or the most efficient.”
But if the rule of law, property rights, and constitutional protections are key to what has made the U.S. financial system the biggest and most dynamic in the world, then investors ignore the erosion of these foundations at their own risk.
CASE FOR THE DEFENSE
But the question of market confidence is often binary. Investors have confidence in market structure and the financial system until they don’t.
Of course, government intervention in a market economy is nothing new, nor is it a bad thing. Indeed, many sectors welcome it, and it can be necessary for reasons such as national security, energy security, or the provision of a social safety net.
But a year into Trump’s second term, the “visible hand” of the president is being felt by many parts of USA Inc, shoving aside the invisible hand of the free market posited by the eighteenth-century economist Adam Smith.
Trump’s capriciousness can still ignite volatility in certain stocks and sectors, of course. Defense giant Lockheed Martin’s shares slumped 7% late last Wednesday after Trump said he would block defense firms’ dividend payments or buybacks, then rebounded 8% in after-hours trading when Trump called for a 50% increase in the defense budget to $1.5 trillion.
But the broader market continues to rise on the back of short-term exuberance and momentum, seemingly unaffected by the most interventionist administration in decades. To be sure, Wall Street lagged its global peers last year by some margin. Perhaps this is a sign that Trump’s visible hand is unnerving investors, but, for now, the warning signal is certainly not flashing red.
(The opinions expressed here are those of the author, a columnist for Reuters)
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(By Jamie McGeever; Editing by Marguerita Choy)
