Investors are ignoring Trump's measures for now, buying stocks

When US President Donald Trump was inaugurated and announced that he would impose new tariffs on imports from US geopolitical allies and rivals, the initial reaction of the stock market was cautious, but the mood of investors has changed as the administration's policies in the field become increasingly "confused", with delays and cancellations, according to a Bloomberg analysis.

So far, investors have ignored the "noise" made by the tariff announcement and bought stocks. While the risk of a global trade war is indeed high, after Trump announced 25% tariffs on steel and aluminum imports, which will take effect in March, and reciprocal tariffs on goods from numerous trading partners (expected in April), stock market indices continue to rise. The S&P 500 closed last week at a record high, but the question is whether investors who are fueling those gains are properly pricing in what Trump will do.

"As investors realize that the tariffs are probably not going to be as punitive as they had expected, they are taking it as good news," said Andrew Slimmon, a portfolio manager at Morgan Stanley, according to Bloomberg. However, Slimmon noted that the market's relatively subdued optimism suggests investors remain wary of the risks associated with the administration's plans, saying that much of the recent inflow of capital into stocks has come from "weaker" shareholders who may be more sensitive to shocks. The market may therefore be increasingly reacting to news about the administration's policies.

A gauge of trade policy uncertainty has risen to its highest level since 2019, when a similar trade war was brewing, according to Bloomberg.

"The uncertainty index and implied market volatility typically move in tandem, and that relationship suggests we could see more volatility," said Adam Turnquist, chief strategist at LPL Financial.

• Volatility signals

While volatility may rise in the medium term, investors haven't positioned themselves for that yet. Hedge funds and other big speculators have been net-short futures contracts tied to the Cboe Volatility Index (VIX) for 16 straight weeks, Commodity Futures Trading Commission data shows. Their net-short position is now near 59,000 contracts, a level last seen in mid-July. The VIX rose to levels not seen since the pandemic in August, and the S&P 500 fell, catching equity investors by surprise after betting that volatility would continue to decline.

"When uncertainty and volatility are high, the market is not going to continue to rise to record highs," added Adam Turnquist.

In other words, strategists' expectations for a 12% rise in the S&P 500 this year seem weak.

"The tariff issue is one of the biggest risks to financial markets, although it falls into the category of risks that you are aware of, but the ultimate size, scope and sequence are not yet known," said Bill Sterling, global strategist at GW&K Investment Management. He emphasizes: "Less noise and more policy visibility would be welcome."

Wall Street banks agree. Goldman Sachs Group Inc. strategists have warned that tariffs pose a key downside risk to their 2025 outlook. Evercore ISI noted that the lack of clarity on trade policy has begun to weigh on investor confidence, and a Bank of America Corp. analysis showed that among the 50 largest companies in the S&P 500, stock volatility, a measure of daily share price movements relative to recent volatility, is heading for a 30-year high.

"With more tariffs and retaliation likely and government spending constrained and potentially making it difficult to extend Trump's 2017 tax cuts, we expect modest gains in stocks this year, with more ups and downs than in 2024," Turnquist said.

Recently, Donald Trump said he would unveil a set of tariffs on imported cars "around April 2." In this context, the American giant Ford Motor Co. reported that the 25% tariffs imposed by Trump on Mexico and Canada, which were postponed to March 4, will "make a hole" in the US auto industry.

RBC Capital Markets strategists say: "The lesson we learned from the S&P 500's brief decline before the delay in tariffs on Mexico and Canada is that U.S. stocks are patient, not prone to overreacting, but they don't have much capacity to absorb bad news." The S&P 500 fell nearly 2% early on February 3, when Trump announced tariffs on neighboring countries, but recovered much of that decline after it became clear that the tariffs would not be implemented.

Also, stocks can seem more resilient than they actually are. For example, on Thursday, after Trump announced his intention to impose reciprocal tariffs, the S&P 500 closed up 1%.

In conclusion, the analysis highlights that Wall Street investors are not completely ignoring the risk of tariffs. Rather, it has led to more selectivity in stock selection.