Why does Wall Street seem to always believe in Trump?

Ask AI · How does market sentiment influence Wall Street’s reaction to Trump’s statements?

Source: Global Market Report

If you’ve been following the news, you might be hard-pressed not to feel that Wall Street’s dramatic 180-degree turn from despair to elation on Monday morning is just proof that stock traders are all a bunch of easily fooled fools.

You may not have noticed: over the weekend, U.S. President Donald Trump set a Monday evening deadline for Iran to fully reopen the Strait of Hormuz, or the U.S. would begin attacking Iran’s power plants. But at around 7:30 AM Eastern Time on Monday, just two hours before the U.S. financial markets opened, Trump pushed that deadline back five days, citing “very good and productive dialogue” with Tehran on a “complete and thorough resolution” of the conflict. (Of course, the all-caps style is his trademark.)

Once the news broke, U.S. stock index futures surged, and oil prices fell. The Dow Jones Industrial Average was nearing “correction” territory last week — down nearly 10% from recent peaks — but on Monday, it soared more than 1,000 points intraday, closing up 630 points, a gain of 1.4%. The broader S&P 500 index rose 1.2%, and the Nasdaq index increased by 1.4%.

As a reader following the news, you might be thinking: Come on, finance folks, have you really been fooled again? This is the same Trump who just two weeks ago said in an interview with CBS that “the war is totally over,” which also triggered a similar stock market rebound and drop in oil prices. This is the same Trump who frequently makes statements and then quickly retracts them, leading Wall Street to even develop a specific trading strategy — “TACO trading,” which stands for “Trump Always Chickens Out,” based on his style of operation.

So, have you really bought into it again?

The answer is: It’s complicated.

This sudden market surge is less about Wall Street believing Trump and more about investors viewing his statement — released while many bleary-eyed New York traders were preparing to sit down at their Bloomberg terminals to start their day — as a reassurance: the president’s disdain for poor market data will ultimately prevent him from following through on those more extreme threats.

“There is no real fundamental support behind these trades — it’s purely trading Trump,” said Daniel Alpert, a partner at Westwood Capital Management.

And trading Trump is more about trading market sentiment than facts. Did Trump really negotiate to resolve the conflict this week? Iran says no, Trump says yes. Most market participants have no way of judging who is right or wrong.

But right now, who is right or wrong might not matter at all.

“The market is not trading the truth but the ‘beauty,’” Alpert quoted John Maynard Keynes’ theory, which compares the stock market to a beauty contest. (If you, like me, dozed off during that chapter in your introductory economics class, in simple terms: In 1936, Keynes envisioned a contest where a newspaper published 100 photographs of faces, and readers were to select the six prettiest. The readers who chose the six most popular photographs won. The idea is that the best strategy is not to pick your favorites, but to select what you think others will like.)

“If you are trading the market, rather than investing for the long term, you are focused on what others think and what they might do,” Alpert said. “You might not think it’s a good thing, or even be sure if it’s a lie, but you believe others will think it’s a good thing, so you place your order… and when you’ve made enough money, you sell and exit the trade.”

Moreover, Monday’s rebound was not entirely based on sentiment. Steve Sosnick, chief market strategist at Interactive Brokers, told me that in recent weeks, stock traders have been following the lead of oil traders, as oil traders have a much clearer understanding of the situation in the Gulf. If oil prices hadn’t fallen significantly, while the stock market still rebounded, we could mock stock investors for being duped by the president.

Another factor driving this rebound is the market’s widespread “fear of missing out” (FOMO).

“No one wants to miss the rebound,” Sosnick added. “Even a tiny bit of good news can provoke a very strong market reaction, possibly even an overreaction.”