Market Thoughts: A matter of trust

I said this a few weeks ago, I think it’s worth repeating. Anyone telling you they know what comes next doesn’t. Perhaps with the exception of the White House. Emphasis, for the moment, on perhaps.

Markets are driven by fundamentals but they rarely trade too long within stable ranges. On a good day it’s what makes investing fun. On a bad day, not so much. We’ve had quite a few bad days recently. We’ll have a few more to get through.

Investors price risk premia, amongst other things, based on the rule of law and its enforceability. Also, the credibility of policymakers to do the right thing. I’d throw in the independence of a central bank and the integrity of accounting systems, governance, compliance and tax collection. The things that have helped make American markets exceptional are now being questioned.

I saw a meme this week I chuckled out loud reading. Not because it was particularly funny, but it encapsulated the violent swings in markets we’re seeing. It featured Donald Trump and Xi Jinping in a series of vignettes playing poker. Trump opens with an “all-in” followed by Xi’s “call.” The last tableau? Trump folds.

It’s always been a matter of trust. Trust is waning. Investors by their very nature are optimists. You get up every day looking for the next opportunity. A good investor is also a pragmatist. You know everything pitched may not be what it seems, in risk characteristics or expected returns. The pessimist is the worst, over the long run. They don’t invest. They never trust.

The affront to Fed independence is a breach of trust. I take the White House at its word about tariffs and trade. It’s misguided math, bad economics. The administration squarely believes in them. That’s what makes a market, a difference of opinion.

Fed Chair Powell has been made the scapegoat, at least at the White House, should a solid economy quickly derail. I expect the haranguing continues at least until the Supreme Court opines on the President’s ability to fire Powell, hopefully before its summer recess.

The administration appeared to blink this week on a few points. The most important was driven by the violent reaction bond investors expressed at the attack on the Fed. Over the next few months I don’t think there is a ‘Trump put’ for equity markets. “Pain for gain” in the words of the President. There will come, however, a breaking point.

The administration walked back some of its rhetoric as bond market moves became riotous. Fire Powell? Just kidding. Really? The U.S. Government bond market is the crown jewel. The dollar a very close second, sceptre to the crown. I hit on the dollar in my last note and why I think it may decline further, but is likely to remain reserve currency. Like all markets, FX doesn’t move in a straight line.

All of which takes me back to markets – they trade on fundamental drivers. At least as a starting point. There was a headline this week I found incredulously baiting: bonds are no longer a riskless asset. They never were. Neither is cash. In a world with rising inflation, cash may not decline in nominal value, but it does in purchasing power. It’s why all the fuss about inflation.

Policy rates set by central banks are the building blocks for pricing fixed income term structure, foreign exchange, credit and equity markets. Obviously, expectations about growth, inflation, balance sheet strength, leverage (government and private sector), default risk, earnings and market liquidity play a part. So does investor sentiment and trust. There’s that word again.

The IMF revised growth targets down this year by 0.9% for the U.S. and 0.6% for China. They took global growth down by 0.5%. Forecasting growth or earnings today is like dancing in the dark. We don’t know how long tariff talks drag on or how hard they hit. I think the IMF is directionally right. If they’re wrong it’s to the downside.

We are about to roll into prime earnings season. Each company will have its own tale to spin but in aggregate I expect we will hear more from C-suite execs hedging the outlook, amping uncertainty, looking for a scapegoat to an otherwise strong earnings season. Expect guidance and the outlook to be cloudy. The scapegoat? Not Jay Powell.

*Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 4/24/25.