Column-Trump trade uncertainty exposes stretched markets to volatility shocks: McGeever By Reuters
Author: Jamie McGeever
ORLANDO, Fla. (Reuters) – U.S. financial markets were more sensitive than usual to economic surprises last year, and as Donald Trump prepares to begin his second term as U.S. president, investors should brace for more of the same in 2025.
Especially in treasuries.
The sensitivity of 10-year yields to inflation and activity data was surprisingly the highest in more than 20 years last year, according to Goldman Sachs. Although inflation has fallen, growth fears have faded, and the Federal Reserve has begun to cut interest rates, these sensitivities remain.
Again, especially in treasuries.
Although the sensitivity of stocks to inflation surprises has fallen as price pressures have eased, it remains high by historical standards. And stocks’ sensitivity to growth surprises, while still modest, has begun to rise almost to pandemic-era levels.
What does this mean for the coming year? While benchmark measures of equity and bond implied volatility are muted, markets are in a weaker position than they were a year ago. By many measures, such as prices, sentiment and valuations, they are extremely stretched.
U.S. stocks have never risen or represented a larger share of global market capitalization, and the Fed’s 100 basis point interest rate cut since September was met with a counterintuitive 100 basis point increase in .
Does this mean that key US markets are ready for a correction? Perhaps. But what’s easier to say with confidence is that we’ll see wider intraday trading ranges and short-term reversals as investors grapple with the biggest downside of all: the Trump agenda.
‘VOLATILITY MAN’
History shows that there is a “strong” link between macro and market volatility, as Citi’s Stuart Kaiser points out. And with the world still in the dark about how Trump’s trade and tariff policies will play out and how the Fed will respond, macro uncertainty is alive and well.
Indeed, the top two “tail risks” for global markets listed in the latest survey of Bank of America fund managers were “global trade war causes recession” and “inflation causes Fed to hike.” Both won 37% of the vote, significantly more than the 10% won by “geopolitical conflict”, the third most frequently cited risk.
“With a number of major political changes on the horizon, markets should be prepared for a lot more volatility ahead,” Deutsche Bank (ETR:) George Saravelos said Monday.
It is true that the first year of Trump’s first term, 2017, turned out to be good for Wall Street, as it rose 19%, despite Trump’s unpredictable actions. But it was a period of low inflation, low interest rates and solid growth. Such low macro volatility is unlikely to happen again this time. And given the stretched nature of today’s markets, even modest economic surprises could trigger big moves.
Just look at the sharp swings in US stocks and the dollar on Monday in response to a media report – later dismissed by Trump – implying that his proposed tariff regime would be less stringent than feared.
But even if the macro “bull” increases, will it be enough to break the generally bullish market consensus in 2025? Maybe not, suggests Phil Suttle, a Washington economist. “(Markets) will be quite volatile, but without significant net direction, as the perceived outlook for these different (tariff) scenarios oscillate,” Suttle wrote in a note titled “Volatility Man” on Monday.
It’s also possible that investors will increasingly ignore Trump’s social media posts about the markets, economic policy or the Fed, as they eventually did in his first term, especially if real-world economic indicators hold steady. But it’s too early for that now.
Given the combination of stretched markets and an unpredictable commander-in-chief, markets will be marked by noise and fury in 2025. It could be a bumpy ride.
(The opinions expressed here are those of the author, a Reuters columnist.)
(Writing by Jamie McGeever; Editing by Paul Simao)
