Donald Trump, who has often pointed to a rising stock market as evidence of his economic prowess, is now willing to put Wall Street at risk if it means winning over Main Street.
Investors should pay attention to this shift in priorities. Anyone counting on the White House to rush to the aid of share prices after the market swoon on Monday is likely to be disappointed.
“There are no economic levers left to pull,” said Joel Naroff of Naroff Economic Advisors in Holland, Pa.
Mr. Trump has already slashed taxes and put the United States track to run annual deficits of a trillion dollars or more from 2022 onward. That leaves little or no room for increased government spending or added tax sweeteners as a way to goose stock prices.
A cut in interest rates is still possible. But that decision is up to the Federal Reserve, and its policy makers are likely to stand pat after a first quarter in which gross domestic product surged ahead at a 3.2-per-cent annualized clip, the best start to a year since 2015.
Rather than looking for new ways to boost stock prices, Mr. Trump is focused on winning the escalating trade dispute with China. The United States announced last week it would increase tariffs on US$200-billion of Chinese imports. Beijing shot back by raising tariffs on around US$60-billion of U.S. imports.
“I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries,” Mr. Trump tweeted on Monday.
Stock markets around the world tumbled as it became clear the conflict between the world’s two largest economies was unlikely to end soon.
“Investors finally woke up to the fact this may ultimately go on a lot longer and be a lot nastier than people had thought,” Mr. Naroff said. He says the President’s willingness to ramp up the fight is “100 per cent domestic politics.” Battling China over what are perceived as its unfair trade practices is an issue that resonates with U.S. voters on both ends of the political spectrum, he said.
The polls bear him out. “American voters are signalling approval of Trump’s tactics, at least so far,” wrote Derek Holt of Bank of Nova Scotia. The President’s approval rating has climbed since the start of the year and now stands at 45 per cent, close to its highest level since February, 2017.
The political gains from a trade war may evaporate if U.S. consumers feel the pinch from higher prices on Chinese imports, or if U.S. farmers complain about lost sales as a result of the Chinese tariffs.
For now, though, allowing stock prices to weaken in exchange for political momentum heading into next year’s presidential election may strike the White House as a reasonable trade.
Any softening in U.S. stock prices would have an additional advantage from the White House perspective: It would add to the pressure on the Fed to cut interest rates.
Mr. Trump has publicly called for the central bank to do just that, but with unemployment at a half-century low, the economic case for adding yet another dollop of stimulus is limited.
That could all change if a U.S.-China trade war drags stock prices lower. The Fed sounded determined to raise rates regularly in its communications last year, but it quickly changed its tone following the stock market slide at the end of last year. Its more conciliatory tone ignited a stock market rally.
Something similar could happen now. Futures markets show traders expect the Fed to trim its key interest rate by a quarter of a percentage point by year end, and any market weakness could move up the expected cuts.
It is unclear whether rate cuts would offset the impact of an extended trade dispute on stock prices. But that may not matter to the White House given the political advantages to be gained from butting heads with China.