ClockWise: Trump and Truss parallels

A new leader hits the ground running, a bewildering array of policy ideas spilling out over their first 50 days in office. Businesses are to get unfunded tax cuts.

An ambitious growth strategy prioritises deregulation and a radical paring back of the state over trade. Increased fossil fuel extraction is given the green light, borders are strengthened, and migrants are threatened with deportation. The very institutional framework is under attack with judges second-guessed, fiscal watchdogs waved away, and central bank inflation concerns dismissed. Rumours swirl around think tanks said to have the leader’s ear. We’re only just getting started, they say. Britannia unchained!

You’re forgiven if you thought until now that I was describing the second coming of Donald Trump. The parallels between recent events in Washington and the frantic short-lived premiership of Liz Truss a little over two years ago are uncanny. With Wall Street suffering heavy losses, it’s natural then to ask if markets could once again vote with their feet, bringing the policy experiment to an end. We suspect the answer is no, at least not unless things get very much worse. Liz Truss’s regime was brought down by so-called bond market vigilantes. Trump’s policies are so far causing pain for the holders of company shares, not bonds, and his largely uninvested support base thinks he’s doing a great job.

The initial market reaction to November’s Presidential election was wholly positive, with US stock prices rising in anticipation of lower taxes and light touch regulation. The mood has soured. Trump was serious about tariffs, Elon Musk is gutting the federal state and threats towards Canada, Panama and Greenland keep coming. Tariffs and deportations are likely to have a negative impact on the economy, but the chaotic on-off nature of the announcements could itself trigger a downturn. Policy uncertainty is at the highest level since the pandemic (chart 1) and recession fears are growing. With US stocks priced for perfection, it’s no surprise the tech-heavy Nasdaq Index has witnessed its worst month since the 2022 bear market.

Chart 1: US Policy Uncertainty and S&P 500 Volatility Index

Those expecting financial markets to force a change of tack in America may have a long wait ahead. There are many similarities with the UK’s experience in the autumn of 2022, but also important differences relating to the nature of the market stress and the support base of the government in question.

Liz Truss came to power towards the end of the greatest bond market crash in a century. Add in the derivative leverage in defined benefit pension schemes and throwing away the fiscal rulebook was like a match to dry tinder. The Bank of England was forced to intervene and mortgage rates surged. Liz Truss didn’t have broad support for her agenda and had never won a general election. Within days she was gone.

In America, the stress is in the stock market which has a less immediate impact on the economy. The American Association of Individual Investors is reporting some of its most pessimistic readings in the last 30 years (chart 2) but Trump’s support base is not heavily exposed. In fact, a February 2025 Gallup survey found 68% of Republican voters satisfied with the way things are going, a record increase from the previous month when only 10% were happy. Donald Trump has only recently returned to power and feels he has a strong mandate for change, even if it means short-term pain.

Chart 2: US Private Investor Bullishness and the S&P 500 Index

Events could move faster if policy starts to undermine bond market confidence. A set of ideas known as the Mar-a-Lago Accords, after the Plaza Accord of 1985 that weakened the US dollar, focuses on the premise that the dollar’s global dominance is somehow bad for America. One proposal is that foreign holdings of US treasury bonds should be swapped for zero coupon irredeemable paper to encourage them to bank elsewhere. Moves in this direction could bring the bond market vigilantes stateside.

Absent bond stress, there’s not likely to be a major change any time soon and we will continue to watch growth and inflation trends to guide our asset allocation views. In the short term, US stocks could rally on better economic news, but strategically we’d be underweight. On a five-year view, valuation is the most important factor influencing returns. You don’t need any other reason to cast the net more widely. Trump is giving us lots of them.

This article was originally published in Money Marketing, and can be found here.

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