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Trump treated the stock market as a report card during his first term and kept a close eye on its performance.
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A negative market reaction to his policies could lead to a government rethink.
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One market strategist says new tariffs could cause a negative reaction in the stock market.
As President-elect Donald Trump begins his second term in January, the stock market could be an important check on the decisions he ultimately makes.
Trump’s ability to pass new policies has been greatly enhanced now that Republicans have full control of Congress, and he is already putting pressure on lawmakers to stick to his agenda. Those members of Congress seem eager to play ball.
The market could therefore be an important counterbalance to Trump’s control over Washington. If his past tenure as president is any indication, he will be alert and sensitive to negative market reactions to his policies.
During Trump’s first term, he showed that he saw the stock market as a real-time indicator of how he was doing, taking credit when the price rises and deflecting blame when it falls.
Trump “demonstrated a keen focus on the stock market as a ‘scorecard’ for the success of his administration,” Mark Malek, chief investment officer at Siebert, told Business Insider.
Perhaps the best example of this came on March 13, 2020. Trump sent the late Fox News host Lou Dobbs an autographed Yahoo! The financial chart of the Dow Jones Industrial Average, which had risen nearly 2,000 points that day in response to Trump declaring COVID-19 a national emergency.
The moment showed how Trump views the market’s relationship to the president’s performance, and observers say it’s possible that if he were to announce or enact policies that cause a sharp decline in stock prices, he could adjust his approach.
Yardeni Research strategist Eric Wallerstein told Business Insider that certain policies that would widen the budget deficit and send bond investors into panic could qualify as an event that could prompt a government rethink.
“The returns would explode, the stock market would react unkindly to that, and then it might change course.”
That view mirrored that of Jeremy Siegel, with the Wharton professor noting shortly after the election that the newly elected president will likely tread lightly when it comes to the markets.
“Both the bond market and the stock market will be a major drag on many of Trump’s programs,” Siegel said.
This dynamic is a top priority for investors entering next year, as some of Trump’s campaign promises, such as mass deportations of immigrants and universal tariffs of 10% to 20%, could be met with dismay by stock investors. That’s because economists say the proposals could trigger a rebound in inflation and limit the Federal Reserve’s ability to keep cutting rates.
