Who can predict what he will do next? Back in 1987, one of the world’s most celebrated experts opined: “Sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors . . . At other times he is depressed and can see nothing but trouble ahead.”
It might seem like an armchair diagnosis of the ever volatile Donald Trump, whose first inauguration speech conjured a vision of “American carnage”, while his second was “confident and optimistic that we are at the start of a thrilling new era of national success”.
“[He] has another endearing characteristic,” the diagnosis went on. “He doesn’t mind being ignored.” Not Trump, then. No, the psychotherapist was the world’s most celebrated investor, Warren Buffett. Lying on Mr Buffett’s couch for psychoanalysis was a hapless gentleman named Mr Market.
Mr Market (a concept first devised by Buffett’s mentor, Benjamin Graham) represents a vivid portrait of financial markets as prone to frenzies and panics, periods of irrational exuberance or yawning depression — a stark contrast to the alternative “efficient market hypothesis”, in which markets swiftly fold new information into the price of assets.
In recent weeks, President Trump and Mr Market have been locked together in a self-destructive spiral, like two drowning men with their arms around each other’s throats. The undignified spectacle would be funny if it weren’t so dangerous. And it raises questions: who is panicking about whom? Is Trump’s rollercoaster tariff policy really as shambolic as it seems, or, as his supporters claim and his opponents fear, is there some brilliant strategy behind it all? Has the market response reflected a cool assessment of the economic consequences — or is it the startle-reflex of a financial system jerked awake from a complacent snooze?
The curious thing about financial markets is that they do not respond to what most of us would regard as news.
In 1971, a young economist named Victor Niederhoffer published an intriguing piece of research titled “The Analysis of World Events and Stock Prices”. Niederhoffer — who would later manage money for George Soros — wanted to answer a question: do stock markets care about front-page news?
Niederhoffer studied the response of the S&P Composite index to news events between 1950 and 1966. As a proxy for a world-shaking story, he used any headline in the New York Times that spanned at least five columns. He found 432 such headlines — about one a fortnight. Did the market notice? Generally not. An existential scream on the front page of the Times was typically met with a yawn down on Wall Street.
There were a few exceptions. Really big moments such as the Suez crisis, the Cuban missile crisis and the assassination of President John F Kennedy were somewhat more likely to produce a large market reaction. But in general Niederhoffer demonstrated that Wall Street operates according to its own logic. Either investors had already anticipated most of the headlines or, more likely, events that seem significant to newspaper editors do not weigh heavily on the stock market.
To put it another way, for the actions of a politician to push global markets violently up or down is extraordinary. (Liz Truss’s 2022 “mini” Budget, it is true, was not in Niederhoffer’s data set.) To do it deliberately is utterly unprecedented. Then again, Trump is an utterly unprecedented politician.
The president began the month by announcing the most disruptive increase in tariffs that the US economy had ever seen — in size the import taxes rivalled the notoriously disastrous Smoot-Hawley tariffs of 1930, but they were introduced more abruptly and in a vastly more integrated world trading system.
Trump then suspended some of the tariffs for a 90-day period. This was widely viewed as the president backing down, but it was more a lurch sideways than a U-turn. Because he dramatically increased the tariff on China, the average tax on US importers did not fall.
This second market-moving announcement was followed by a third: Chinese smartphones and other consumer electronics would be exempt from that punitive tariff. Shortly after that announcement came a fourth: the consumer-electronics exemption was itself temporary, and the White House was working on yet another tariff plan.
This is certainly not how to behave if the aim is to persuade manufacturers to bring their factories to the US. Any tariffs would have to be far steadier, more predictable and more credible than that. A cynic might note that it is exactly how to behave if you want to give your cronies the opportunity to trade on inside information (something the White House has denied). But the most obvious interpretation is probably the right one: Trump’s tariff policy keeps changing because Trump cannot make up his mind.
So how should we read the market reaction to Trump’s announcements? The S&P 500, the basic index measuring the performance of large American stocks, fell nearly 5 per cent on April 3 and 6 per cent on April 4. These were big falls, especially on consecutive days.
Yet there have been bigger. During the financial crisis of 2008 and the pandemic of 2020, there were several days with larger drops in the S&P 500. On October 19 1987, the S&P 500 fell more than 20 per cent for no readily apparent reason. And of course there is the Great Crash of 1929: markets fell by more than 10 per cent on both October 28 and 29 of that year, and by nearly 10 per cent a week later.
Trump’s tariffs have no precise historical precedent, but the echoes of 1929 and 1930 are loud enough. The bear market that began in 1929 lasted nearly three years, and by the end of that long downward grind, the Dow Jones Industrial Average had lost 89 per cent of its value and the US was in the depths of the Great Depression. If that’s the closest forerunner we have, is there a case that the markets have been far too calm?
The problem with interpreting market reaction is that it remains unclear what exactly it should be reacting to. A pessimistic perspective is that, since Trump’s new taxes in effect sever trade between the world’s two largest economies, the US and China, as well as throwing spanners into the gears of the US-Canada-Mexico trading system, the stock market reaction wasn’t just calm, it was complacent. The downward jolt of the S&P 500 after the initial announcement merely undid a few months of recent gains — an investor who bought the index a year earlier would still have been showing a profit. That hardly suggests that Mr Market has fully internalised the risks of a severe downturn.
A more optimistic view is that the market was unperturbed by Trump’s tariff vows because investors assumed any tariffs would be modest. When vast tariffs were announced instead, the market reaction was sharp but small; again, investors assumed he didn’t really mean it. And when Trump promptly slashed some tariffs — temporarily, we are told — and then increased others, and then announced exemptions, and then announced that the exemptions were also temporary, stock market investors decided that the problem wasn’t really the tariffs, because they would come and go. The problem was the clown show in the White House.
Bond market investors appear to have reached the same conclusion, but are far more gloomy about what that implies. As volatility rose, investors sold US Treasuries and the dollar. This is not normal. Typically, investors respond to chaos by buying dollars and US Treasuries, even if the US itself is the source of the chaos.
This month we discovered the exception to that rule. Partly this is because things are already a little precarious: in its periodic fights over the US debt ceiling, Congress has displayed an unnerving willingness to borrow vast piles of money and then flirt with not paying it back. But also, surely, it is because with its tariffs on an island inhabited only by penguins, its pseudo-mathematical justification of the word “reciprocal” and its habit of swerving every few days, the White House has served up a display of policymaking so brazenly amateurish that it has struck shock and awe into bond markets.
The sheer uncertainty is disastrous for the real economy, too. Corporate decision makers would like to get on with the making of decisions. Should they redesign their supply chains? Relocate production to avoid tariffs? Shut down some operations and sack their staff? Start building and hiring elsewhere? For now the only reasonable response is to hold on tight to the giant mahogany desk in front of them and pray the world stops spinning. This is the paradox, then: stock market investors are cautiously optimistic because they expect that Trump is going to change his mind; physical investments are on hold because people are waiting to see what will happen after Trump changes his mind; and bond market investors are nauseated because Trump keeps changing his mind. But it is the bond market investors on whom the world’s financial system rests.
Trump has been in office for just three months. That leaves 45 months to go. What should retail investors do now?
The range of outcomes is not easy to discern. The US has clearly lost credibility — as an ally, as a place to invest, as a trading partner and as a country where the rule of law is paramount. If the world suffers no more than a recession as a result, we will have escaped lightly.
Yet a sunnier scenario is not hard to imagine: it is conceivable that Trump has finally gone too far, been so transparently incompetent and done so much damage to the people who supported him that the rest of the US political system will start constraining his urges.
If you care to make a bet on either of those outcomes you are braver than I am. But in a world where every old certainty seems to have been upended, it may be that a familiar investment strategy still makes sense: buy the boring stuff, diversify your investments and above all do not pay too much attention to the mood swings either of President Trump or of Mr Market.
An extraordinary study by the economists Brad Barber and Terrance Odean, published a quarter of a century ago, looked at the performance of more than 1,600 investors who embraced the internet revolution in the 1990s, moving from telephone-based trading to an early web-based trading platform. Barber and Odean compared those investors to similar ones who stuck with the familiar phone-based technology. “Those who switch from phone-based trading to online trading experience unusually strong performance prior to the switch,” explained Barber and Odean, “accelerate their trading after going online, trade more speculatively after going online, and experience subpar performance.”
What happened? The most plausible explanation is the “illusion of knowledge” — a well-established psychological phenomenon that people who are given more information don’t become much better at forecasting, but they do become much more confident. The new online platform gave investors false confidence and tempted them to trade too often, as well as making those speculative trades cheaper and easier. Paradoxically, if they had endured the apparent disadvantage of sticking to a slower, more expensive, less information-rich method of trading they would have done substantially better as a result.
That was the 1990s; this is 2025. But the principle still holds. Trump is a president who has mastered the art of capturing attention in a fast-twitch age, but investors who wish to prosper would do well to avoid social media and the frenetic stock-ticker world of business television. The FT Weekend, alternated with a good novel, may be the perfect information diet for the age of Trump.
One prediction can be made with some confidence: whether or not these chaotic weeks leave a lasting impression on our finances, they are likely to leave a lasting impression on our psyches. It is not often that a stock market move makes much impression on the ordinary citizen and, as Niederhoffer showed back in 1971, it is even more unusual for lurches in the market to be so clearly connected to White House decisions.
People may subconsciously carry this moment with them for a long time. In 2009, the economists Ulrike Malmendier and Stefan Nagel published a research paper titled “Depression Babies”. Malmendier and Nagel studied several decades of financial survey data and concluded that each cohort’s attitude to investment was shaped by their lifetime experiences of investment returns. For example, young investors in the late 1990s were keen stock market investors, because ever since they had been aware of the market it had been booming; older investors had seen harder times and were more cautious.
Malmendier and Nagel followed up with similar research showing how lifetime experiences of inflation shaped expectations of future inflation — even among central bankers, who would surely think of themselves as driven by hard data rather than hard knocks.
So what will the lesson be this time? Possibly that when — seven years ago — Trump tweeted that “trade wars are good, and easy to win”, he was mistaken. Possibly that you shouldn’t put all your eggs in one basket, even if the basket is the S&P 500 and it’s been having a wonderful run. Possibly that following every twist of the news will not give you an investment edge, even if it does give you an ulcer.
Whatever the judgment of history, there is something compelling about the frantic struggle between President Trump and Mr Market. Trump has demonstrated his remarkable capacity to dominate the headlines and an equally remarkable capacity to make things happen — even if they are bad things. Trump can make the market go down; he can make it bounce back up again.
But Mr Market does not bow and scrape to Trump with the deference of Republican politicians or craven business leaders. That’s just not how he rolls. He has absolutely no interest in appeasing the president. As Buffett explained back in 1987, Mr Market is sometimes euphoric and he is sometimes depressed. But Mr Market has one great virtue: he will always speak truth to power.
Written for and first published in the Financial Times on 19 April 2025.
Loyal readers might enjoy the book that started it all, The Undercover Economist.
I’ve set up a storefront on Bookshop in the United States and the United Kingdom. Links to Bookshop and Amazon may generate referral fees.
