Wall Street’s Bet That Stock Market Will Temper Trump Pays Off

(Bloomberg) — It’s the bet Wall Street made as soon as Donald Trump was elected president. For all the threats of tariffs against US allies and rivals, stock vigilantes were skeptical that he’d do anything to really damage the stock market. 

That’s what happened Monday, as equity indexes in the US, Canada and China plunged overnight on fears of tariffs disrupting the global economy, only to claw back most of the declines by mid-session after Trump agreed to delay levies on Mexico following a chat with Mexican President Claudia Sheinbaum. 

The S&P 500 Index, which sank almost 2% at the start of trading, is down just 0.9% as of 12:32 p.m. in New York. Canada’s S&P/TSX Composite Index immediately tumbled 3.1%, but pared its decline to 1%. And the Nasdaq Golden Dragon Index, which is comprised of companies that do business in China but have stocks listed in the US, fully reversed its 3% drop and is up 0.3%.

“Investors were hoping that Trump was playing a game of chicken on tariffs,” said Michael Bailey, director of research at FBB Capital Partners.

Tariff-sensitive stocks in particular staged a comeback. Chips giant Nvidia Corp. was down as much as 5.9% but cut that more than in half. The move by General Motors Co. was even more dramatic, slicing a 6.3% plunge to around 1%. And the S&P 500 energy sector reversed a 1.1% decline to turn positive. 

It’s a sign that investors were eager to shrug off the latest threat as potential posturing. It also shows their faith in the factors that have boosted markets this year, including a dovish Federal Reserve, a resilient US economy and strong corporate earnings.

Wall Street’s riskiest corners, which soared in recent months as the Fed was cutting rates and bulls speculated Trump would stoke growth, also came off their session lows.

The small-capitalization Russell 2000 Index fell as much as 2.5% but cut that 1.1%, and a version of the S&P 500 Index that strips out market-cap bias rebounded from a 2% decline to be down 0.6% as of midday. Meanwhile, a Goldman Sachs gauge of most-shorted stocks, which includes firms like Roku Inc. and Peloton Interactive Inc., pared its 3.5% fall to 1%. A basket tracking profitless tech stocks was down 0.4% after falling as much as 4.1%. MicroStrategy Inc. came off its 7.7% plunge to trade 1.1% lower. Bitcoin, which briefly fell below $93,000, reversed to top $98,600.

“Traders believe that in the end the Trump bluster and showmanship has tended to give way to a potential ‘deal,’” said Scott Colyer, chief executive at Advisors Asset Management. “I would expect Canada to come up with something pretty quickly.”

Equity positioning for rules-based and discretionary investors, who rely on predefined guidelines and algorithms, fell in the week through Friday, data compiled by Deutsche Bank AG show. From a contrarian perspective, this implies dry powder to buy equities in the sessions ahead. 

“The bullish positioning into the weekend and the quick snapback on the favorable Mexico tariff delay suggests investors expect market to move beyond the new trade war,” FBB’s Bailey said.

The Cboe Volatility Index, or VIX, which measures implied volatility of the benchmark US equity futures via out-of-the-money options, is trading below 19, a level that doesn’t necessarily scream outright danger in an of itself. However, it’s 15% above its average reading in the past year, and the volatility curve implies rising uncertainty for weeks to come.

“If negotiations fail and its broad based tariffs, risk off,” said Dennis Debusschere, president and chief market strategist at 22V Research. “Risk on if broad-based tariffs are never implemented. Timing that is tricky. It could take a few months before we know for sure.”

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