Wall Street betting president won’t let stocks collapse

Investors are once again growing worried about the US-China trade war. But Wall Street isn’t completely freaked out.

Even after the recent tumble, the S<><><><><><><><><><><> <><><><><><><><><><><><><><> <><><><><><><><><><><><><><><><> <><><><><><><><><><><><><>&P 500/a is sitting just 6% away from all-time highs. And the VIX volatility index is hardly flashing panic./ppOne major factor: Investors know that President Donald Trump is a href=”https://www.cnn.com/2018/12/21/investing/stock-market-trump/index.html” target=”_blank”very focused on swings in the stock market./a There’s a widespread belief that Trump won’t let anything truly bad happen to stocks before the next presidential election./ppWall Street is betting that if the market plunges far enough, the White House will throw in the towel and find a way to make trade peace with China rather than risk losing in 2020./pp”If the pain gets too great in the economy and stock market, he will have to find a face-saving solution,” said Carter Mack, president and co-founder of JMP Group, a San Francisco-based investment bank./pp’Security blanket’/ppIt’s a new spin on the Fed put, the term coined for a trading strategy based on the belief that the Federal Reserve will come to the rescue of markets and the economy by lowering interest rates./ppThe Trump put is a bet that the president won’t allow the market to collapse./pp”There is a security blanket,” said Jeff Kleintop, chief global investment strategist at Charles Schwab. “It certainly seems this administration is more reactive to the stock market.”/ppTrump checks financial markets a href=”https://www.cnn.com/business/live-news/stock-market-news-today-050819/h_29d853bb8c430e002c7c46193b1eade5″ target=”_blank””every few hours,”/a according to Stephen Moore, a Trump campaign adviser./pp”He understands that if the stock market and economy crash on him, there’s no way he can get re-elected,” Moore said earlier this month at the SALT Conference in Las Vegas./ppRetaliation jitters/ppFinancial markets have wobbled in recent weeks because of concerns about the escalating trade war between the world’s two biggest economies./ppJittery investors have poured money into bonds. That’s driven the 10-year Treasury yield down to the lowest levels since late 2017./ppTrump has threatened to impose tariffs on all remaining US imports from China. And Chinese state media has floated the potential for harsh retaliation, including restricting imports of rare-earth minerals or even dumping Beijing’s vast holdings of US Treasuries./ppInvestors are hoping Trump and Chinese President Xi Jinping make progress on trade negotiations at next month’s G-20 summit./ppRyan Nauman, market strategist at Informa Financial Intelligence’s Zephyr, warned that a “complete breakdown” of US-China talks could cause US stocks to plunge 10% to 15% from current levels./pp”That won’t bode well for Trump and his reelection probabilities,” said Nauman. “I do think that will put pressure on him to get a deal done.”/ppFacing economic and market turbulence, Trump and Xi reached a temporary trade truce in late 2018 in Argentina./ppWhat if the trade war can’t be turned off?/ppHowever, analysts warned against assuming that Washington and Beijing will automatically reach a face-saving deal this time./pp”Usually it’s the market and economy that drive political outcomes, rather than politics driving market outcomes,” said Kleintop. “There’s a limit to what the president can do.”/ppOne risk is that Trump decides picking a fight with China is popular enough politically to overshadow the economic fallout./ppAnother potential problem is that Trump may opt for a deal — only to rebuffed by Beijing./pp”China is digging in its heels,” said Kristina Hooper, chief global market strategist at Invesco. “It seems China is very focused on teaching the US a lesson.”/ppIn other words, Trump may not be able to simply flip a switch to make the trade war go away./p