During Donald Trump’s first term as US president, he regularly referred to rising stock markets as evidence of the success of his economic policies. “Highest Stock Market EVER”, Trump wrote on social media in 2017 after record gains. “That doesn’t just happen!”
And after securing a second term in November 2024, some of Trump’s close advisers told the New York Times that the president “sees the market as a barometer of his success and abhors the idea that his actions might drive down stock prices”.
This, in addition to a broader economic policy agenda committed to lower regulation and significant tax cuts, had Wall Street investors bullish about their prospects under the new Trump administration.
But fears of an escalating trade war have seen the S&P 500, an index of the leading 500 publicly traded companies in the US, drop more than 10% from its February 2025 high. A decline of this magnitude in a major index is what professional traders refer to as a “correction”. In less than a month, roughly US$5 trillion (£3.9 trillion) has been wiped off the value of US stocks.
So, what exactly is driving down stock prices? Economists cite the president’s brinkmanship, as well as his start-stop approach to tariffs with Canada and Mexico, as having rattled global investors. Some commentators believe this “chaotic” trade agenda has created huge uncertainty for consumers, investors and businesses.
In view of such policies, a recent JP Morgan report said that US economic policy was “tilting away from growth”, and put the chances of a US recession at 40%, up from 30% at the start of the year. Moody’s Analytics has upped the odds of a US recession from 15% to 35%, citing tariffs as a key factor driving the downturn in its outlook.
Any economic downturn would have an adverse impact on the profitability of US corporations, and the declining share prices reflect the negative outlook from investors.
So far, the Trump administration appears unfazed by the US stock market decline. In an address to Congress on March 4, Trump declared his use of tariffs was all about making America rich again. “There will be a little disturbance, but we’re okay with that,” he said.
The White House has, since then, announced that some short-term pain may be necessary for Trump to implement his trade agenda successfully, which is designed to bring manufacturing jobs back to the US.
So, should we read this economic turbulence as a temporary blip? Or is it symptomatic of a more fundamental shift in the US economy?
Change of strategy
Stephen Miran, who was recently confirmed as chairman of Trump’s council of economic advisers, wrote a paper in November 2024 titled: A User’s Guide to Restructuring the Global Trading System. The paper gives us an insight into the Trump administration’s wider economic strategy.
It sets out Trump’s desire “to reform the global trading system and put American industry on fairer ground vis-a-vis the rest of the world”. Miran cites persistent US dollar overvaluation as the root cause of economic imbalances.
Miran does not believe that tariffs are inflationary, and argues that their use during Trump’s first presidential term had little discernible macroeconomic consequences. He does concede that tariffs may eventually lead to an appreciation – or further overvaluation – of the US dollar. However, Miran sees the extent of that appreciation as “debatable”.
He sees tariffs as a tool for leverage in trade negotiations. The administration could, for example, agree to a reduction in tariffs in exchange for significant investment is the US by key trading partners. China investing in car manufacturing in the US is specifically mentioned in his analysis.
Miran also states his belief that tariffs can be used to raise tax revenues from foreigners in order to retain low tax rates on American citizens.
Some economists agree that the US dollar is overvalued. A combination of its role as the world’s reserve currency, as well as the attractiveness of the US economy as an investment destination, fuels demand for the US dollar and makes it stronger.
A strong US dollar has made American manufacturing exports less competitive. This has cost American jobs. The “rust belt” states of the north-eastern and mid-western US have experienced a decline in manufacturing employment over the past 40 years, which is evidence of this.
However, it is worth noting that the many US manufacturers who import manufactured parts or components to make their products do benefit from a stronger dollar. This is because it makes the parts and materials they are importing cheaper. US mortgage holders and investors also benefit from a stronger dollar through lower interest rates on loans.
Steven Englander, the head of research and strategy at Standard Chartered bank, believes there are some contradictions in the Trump administration’s approach.
In a recent interview with the Financial Times, Englander said: “The problem for the new administration is that it simultaneously wants a weaker dollar, a reduced trade deficit, capital inflows, and the dollar to remain the key currency in international reserves and payments.”
Reduced trade deficits and capital inflows would typically strengthen the US dollar, as does its position as the world’s reserve currency.
As Miran says in his paper: “There is a path by which the Trump administration can reconfigure the global trading and financial systems to America’s benefit. But it is narrow, and will require careful planning, precise execution, and attention to steps to minimise adverse consequences.”
Only time will tell whether the Trump administration can successfully navigate this “narrow” path. In the meantime, the recent turbulence in US stock prices appears to be acceptable to the Trump administration in their pursuit of reforming the global financial system.
