Six
months into Donald Trump’s second presidential term, the S&P 500, Nasdaq
and Dow Jones are
breaking records as if all the old threats — trade wars, inflation, and
geopolitical tensions — have magically evaporated, and the economy is thriving
like never before. Unfortunately, that has not exactly been the case.
Progress
on the trade front has mainly been superficial, limited to public gestures
rather than substantive breakthroughs. For example, the EU, rather than moving
toward an agreement with the U.S., has focused on contingency plans, showing
deep skepticism about a deal materializing.
Worse
still, last week Trump announced plans to send letters to over 150 countries
that had previously avoided the trade war with the U.S., warning them of
possible new tariffs of 10% or even 15%. This brings us to the second
unresolved challenge: rising prices fueled by protectionist
U.S. policies.
While
businesses have mostly absorbed these higher import costs, the Fed’s July Beige
Book warns that this will not last forever. Consumer prices could start rising
as early as late summer and accelerate rapidly unless there is positive news on
trade agreements, which have been scarce.
Against
this backdrop, it is clear why the Fed is delaying the resumption of rate cuts.
However, investors don’t seem too worried, judging by the continued rise in the
S&P 500, Bitcoin and Ethereum
prices rally, etc. Even if rates are not lowered in July, many expect a
cut in September, so the wait does not seem too long.
There
has been somewhat more visible movement on the geopolitical front, but the
underlying problems persist. Iran has still not joined the nuclear deal, the
Israeli operation in Palestine continues, and the primary headache for Europe —
the Russia-Ukraine conflict — remains unresolved despite multiple rounds of
talks.
In
short, the picture hasn’t changed much over the past six months. So, the
current optimism mainly hinges on the hope that most of the mentioned
challenges will be resolved soon. It also helps that Trump keeps backing down
on his threats, which adds a bit of FOMO (fear of missing out) to the mix.
The U.S.
economic situation has not deteriorated sharply, helping bullish sentiment. For
example, U.S.
retail sales rose 0.6% month-on-month in June,
and major U.S. companies have posted quarterly profits that once again exceeded
analysts’ pessimistic expectations.
As for
how long the market can remain oblivious to reality, probably until some
unexpected adverse event forces a rethink. One possible trigger could be
Tesla’s quarterly report on Wednesday, which analysts expect to disappoint due
to tariffs and weaker-than-expected deliveries.
This article was written by FL Contributors at investinglive.com.