The $50 trillion guardrail on Trump

Donald Trump is returning to the White House with fewer constraints than in his first term. Several Republicans in Congress who opposed Trump have either changed their stance or have been defeated. Voices against tariffs, such as former advisers, are not expected to be part of the new administration. Special counsel investigations have concluded, and the Supreme Court has extended presidential immunity from prosecution.

However, the $50 trillion US stock market could influence Trump's actions. During his first term, Trump paid close attention to market trends, viewing the Dow Jones as an indicator of his success. He frequently highlighted market achievements, diverging from the market-neutral stance taken by past and current presidents. Recently, Trump expressed great satisfaction with the stock market's initial rise following his decisive win.

A market downturn triggered by a Trump policy—perhaps involving tariffs on China or altering the Federal Reserve—could force Trump to reconsider. Analysts believe the stock market could act as a check on Trump's ambitious policies. Investors might react negatively if Trump attempted to dismiss the Federal Reserve Chair, considering their often fraught relationship.

Previous experiences show markets reacting unfavorably due to uncertainty over Trump's trade policies. For instance, during the US-China trade war's peak, markets were unstable, prompting Trump to seek resolutions. This prior market turbulence could easily recur if Trump imposes high tariffs on China, affecting US imports and potentially raising inflation.

Despite this, some experts doubt the market's influence, stating Trump might disregard investor feedback, assigning blame elsewhere. The bond market now takes center stage; it fell as concerns rose about Trump's policies increasing national debt and inflation, counteracting initial stock market gains. High bond yields might curb growth by raising loan costs, impacting mortgages and businesses.

Higher bond yields also risk reducing stock prices, as investors weigh bond advantages against equities, sparking a dip from previous stock highs. Market analysts note recent bond yield increases are alarming equity investors. While Trump proposes extensive tax cuts, the bond market could challenge these plans if investors resist rising budget deficits.

The bond market's reaction could shape legislative outcomes if investors oppose Trump's immigration policies, like mass deportations, which might inflate costs. The extent of market influence on Trump's decisions remains uncertain, but the coming months could reveal how much economic discomfort Trump is willing to endure.