Even as markets rally, Trump's policy shifts keep investors on edge
Investors see rally to fresh highs as fragile
Analysts describe environment of 'extreme policy uncertainty'
Options market shows little sign of euphoria
Wide bid/ask spreads, diminished liquidity characterise US stocks
NEW YORK, June 28 — As Wall Street puts April's tariff shakeout in the rearview mirror and indexes set record highs, investors remain wary of US President Donald Trump's rapid-fire, sometimes chaotic policymaking process and see the rally as fragile. The S&P 500 and Nasdaq composite index advanced past their previous highs into uncharted territory on Friday. Yet traders and investors remain wary of what may lie ahead. Trump's April 2 reciprocal tariffs on major trading partners roiled global financial markets and put the S&P 500 on the threshold of a bear market designation when it ended down 19 per cent from its February 19 record-high close. This week's leg up came after a US-brokered ceasefire between Israel and Iran brought an end to a 12-day air battle that had sparked a jump in crude prices and raised worries of higher inflation. But a relief rally started after Trump responded to the initial tariff panic that gripped financial markets by backing away from his most draconian plans.
JP Morgan Chase, in the midyear outlook published on Wednesday by its global research team, said the environment was characterised by 'extreme policy uncertainty.'
'Nobody wants to end a week with a risk-on tilt to their portfolios,' said Art Hogan, market strategist at B. Riley Wealth. 'Everyone is aware that just as the market feels more certain and confident, a single wildcard policy announcement could change everything,' even if it does not ignite a firestorm of the kind seen in April.
Part of this wariness from institutional investors may be due to the magnitude of the 6 per cent S&P 500 rally that followed Trump's re-election last November and culminated in the last new high posted by the index in February, said Joseph Quinlan, market strategist at Bank of America.
'We were out ahead of our skis,' Quinlan said. A focus on deregulation, tax cuts and corporate deals brought out the 'animal spirits,' he said. Then came the tariff battles.
Quinlan remains upbeat on the outlook for US stocks and optimistic that a new global trade system could lead to US companies opening new markets and posting higher revenues and profits.
But he said he is still cautious. 'There will still be spikes of volatility around policy unknowns.'
Overall, measures of market volatility are now well below where they stood at the height of the tariff turmoil in April, with the CBOE VIX index now at 16.3, down from a 52.3 peak on April 8.
Unstable markets
'Our clients seem to have become somewhat desensitised to the headlines, but it's still an unhealthy market, with everyone aware that trading could happen based on the whims behind a bunch of' social media posts, said Jeff O'Connor, head of market structure, Americas, at Liquidnet, an institutional trading platform.
Trading in the options market shows little sign of the kind of euphoria that characterised stock market rallies of the recent past.
'On the institutional front, we do see a lot of hesitation in chasing the market rally,' Stefano Pascale, head of US equity derivatives research at Barclays, said.
Unlike past episodes of sharp market selloffs, institutional investors have largely stayed away from employing bullish call options to chase the market higher, Pascale said, referring to plain options that confer the right to buy at a specified future price and date.
Bid/ask spreads on many stocks are well above levels O'Connor witnessed in late 2024, while market depth — a measure of the size and number of potential orders — remains at the lowest levels he can recall in the last 20 years.
'The best way to describe the markets in the last couple of months, even as they have recovered, is to say they are unstable,' said Liz Ann Sonders, market strategist at Charles Schwab. She said she is concerned that the market may be reaching 'another point of complacency' akin to that seen in March.
'There's a possibility that we'll be primed for another downside move,' Sonders addded.
Mark Spindel, chief investment officer at Potomac River Capital in Washington, said he came up with the term 'Snapchat presidency' to describe the whiplash effect on markets of the president's constantly changing policies on markets.
'He feels more like a day trader than a long-term institutional investor,' Spindel said, alluding to Trump's policy flip-flops. 'One minute he's not going to negotiate, and the next he negotiates.'
To be sure, traders seem to view those rapid shifts in course as a positive in the current rally, signaling Trump's willingness to heed market signals.
'For now, at least, stocks are willing to overlook the risks that go along with this style and lack of consistent policies, and give the administration a break as being 'market friendly',' said Steve Sosnick, market strategist at Interactive Brokers. — Reuters
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WASHINGTON (Reuters) -The U.S. Supreme Court's landmark ruling blunting a potent weapon that federal judges have used to block government policies nationwide during legal challenges was in many ways a victory for President Donald Trump, except perhaps on the very policy he is seeking to enforce. An executive order that the Republican president signed on his first day back in office in January would restrict birthright citizenship - a far-reaching plan that three federal judges, questioning its constitutionality, quickly halted nationwide through so-called "universal" injunctions. But the Supreme Court's ruling on Friday, while announcing a dramatic shift in how judges have operated for years deploying such relief, left enough room for the challengers to Trump's directive to try to prevent it from taking effect while litigation over its legality plays out. "I do not expect the president's executive order on birthright citizenship will ever go into effect," said Samuel Bray, a Notre Dame Law School professor and a prominent critic of universal injunctions whose work the court's majority cited extensively in Friday's ruling. Trump's executive order directs federal agencies to refuse to recognize the citizenship of children born in the United States who do not have at least one parent who is an American citizen or lawful permanent resident, also called a "green card" holder. The three judges found that the order likely violates citizenship language in the U.S. Constitution's 14th Amendment. The directive remains blocked while lower courts reconsider the scope of their injunctions, and the Supreme Court said it cannot take effect for 30 days, a window that gives the challengers time to seek further protection from those courts. The court's six conservative justices delivered the majority ruling, granting Trump's request to narrow the injunctions issued by the judges in Maryland, Washington and Massachusetts. Its three liberal members dissented. The ruling by Justice Amy Coney Barrett, who Trump appointed to the court in 2020, emphasized the need to hem in the power of judges, warning against an "imperial" judiciary. Judges can provide "complete relief" only to the plaintiffs before them, Barrett wrote. A HOST OF POLICIES That outcome was a major victory for Trump and his allies, who have repeatedly denounced judges who have impeded his agenda. It could make it easier for the administration to implement his policies, including to accelerate deportations of migrants, restrict transgender rights, curtail diversity and inclusion efforts, and downsize the federal government - many of which have tested the limits of executive power. In the birthright citizenship dispute, the ruling left open the potential for individual plaintiffs to seek relief beyond themselves through class action lawsuits targeting a policy that would upend the long-held understanding that the Constitution confers citizenship on virtually anyone born on U.S. soil. Bray said he expects a surge of new class action cases, resulting in "class-protective" injunctions. "Given that the birthright-citizenship executive order is unconstitutional, I expect courts will grant those preliminary injunctions, and they will be affirmed on appeal," Bray said. Some of the challengers have already taken that path. Plaintiffs in the Maryland case, including expectant mothers and immigrant advocacy groups, asked the presiding judge who had issued a universal injunction to treat the case as a class action to protect all children who would be ineligible for birthright citizenship if the executive order takes effect. "I think in terms of the scope of the relief that we'll ultimately get, there is no difference," said William Powell, one of the lawyers for the Maryland plaintiffs. "We're going to be able to get protection through the class action for everyone in the country whose baby could potentially be covered by the executive order, assuming we succeed." The ruling also sidestepped a key question over whether states that bring lawsuits might need an injunction that applies beyond their borders to address their alleged harms, directing lower courts to answer it first. STATES CHALLENGE DIRECTIVE The challenge to Trump's directive also included 22 states, most of them Democratic-governed, who argued that the financial and administrative burdens they would face required a nationwide block on Trump's order. George Mason University constitutional law expert Ilya Somin said the practical consequences of the ruling will depend on various issues not decided so far by the Supreme Court. "As the majority recognizes, states may be entitled to much broader relief than individuals or private groups," Somin said. New Jersey Attorney General Matthew Platkin, a Democrat who helped lead the case brought in Massachusetts, disagreed with the ruling but sketched out a path forward on Friday. The ruling, Platkin said in a statement, "recognized that nationwide orders can be appropriate to protect the plaintiffs themselves from harm - which is true, and has always been true, in our case." Platkin committed to "keep challenging President Trump's flagrantly unlawful order, which strips American babies of citizenship for the first time since the Civil War" of 1861-1865. Legal experts said they expect a lot of legal maneuvering in lower courts in the weeks ahead, and the challengers still face an uphill battle. Compared to injunctions in individual cases, class actions are often harder to successfully mount. States, too, still do not know whether they have the requisite legal entitlement to sue. Trump's administration said they do not, but the court left that debate unresolved. Meanwhile, the 30-day clock is ticking. If the challengers are unsuccessful going forward, Trump's order could apply in some parts of the country, but not others. "The ruling is set to go into effect 30 days from now and leaves families in states across the country in deep uncertainty about whether their children will be born as U.S. citizens," said Elora Mukherjee, director of Columbia Law School's immigrants' rights clinic. (Reporting by Andrew Chung; Additional reporting by John Kruzel, Nate Raymond, Jan Wolfe and Trevor Hunnicutt; Editing by Will Dunham)
