Why are leading equity markets staying calm – bullish even – in the face of a cascade of startling policy actions or threats by the Trump administration, affecting everywhere from Venezuela to Greenland and from Iran to Europe?
Comments from diverse sources ranging from Wall Street analysts to the International Monetary Fund suggest that markets may be becoming inured to US President Donald Trump’s tantrums, in the same way that the global economy has reacted far less sharply than expected to his tariffs.
But the one factor that many analysts appear to be overlooking is the fact that equity markets have probably become too big to be allowed to fail.
The exponential growth of exchange-traded funds has led to trillions of dollars of new money gushing into stocks. This has been officially aided and encouraged by government-initiated schemes to popularise equity investment, including Japan’s Nippon Individual Savings Account and the UK’s Individual Savings Account.
Pension funds, life insurance companies and myriad other institutional investors are feeding the equity pool by directing individual savings into stock markets.
None of these institutions have an interest in shutting the valve, any more than the asset management industry, however bad the political and economic news.
Selling pressure on any significant scale could thus remain muted in global equity markets unless “noisy” threats by Trump and certain members of his administration translate into more concrete and damaging policy actions.
The IMF effectively acknowledged this, noting in the January 19 update to its World Economic Outlook that “investor sentiment continues to support high equity prices and historically narrow credit spreads”.
“Callous” markets
This benign view of equity market prospects was apparent too in comments made by fund managers on CNBC. Their responses to the question of why markets are shrugging off the headlines – and what could cause a reaction – was revealing.
According to Eric Freedman, chief investment officer at Chicago-based Northern Trust Wealth Management, which manages US$493 billion of assets, Trump’s actions and rhetoric on Iran, Venezuela and Greenland hadn’t moved markets partly because no other large economic or military powers had responded.
Alex Morris, chief executive officer of Washington-headquartered F/m Investments, said that “geopolitics are simmering, but not boiling over”. The muted market reaction was underpinned by a “growing inurement” to what Trump says and, increasingly, to what he does, he added.
“There are a lot of issues but as yet, they haven’t created an impact via investor sentiment or activity,” according to Toni Meadows, head of investment at UK-based BRI Wealth Management. “Greenland is [the] bigger deal in terms of impact as this is an argument within NATO, so if at some point the market believes Trump’s threat to make it a military conflict, then markets will react.”
Benjamin Jones, global head of research at Invesco, said that “markets are callous and only react meaningfully and sustainably when these events impact economic fundamentals or lead to a change in policy”.
Any or all of these views may be valid as factors contributing to market stability, but they ignore important structural changes in equity market fund inflows.
