Yahoo Finance answers: 'Will Trump call the stock market stupid again?'

Rick Newman
Senior Columnist

I love this question. Andrew Player of Carlsbad, Calif., who sent it in, is referring to a Trump tweet from Feb. 7, when he said it was a “big mistake” for investors to sell and the stock market to decline.

Another stock selloff kicked off March 1, after Trump said he planned to impose new tariffs of 25% on steel imports and 10% on aluminum imports. Investors hate trade wars, and they’re worried about two things: whether the new tariffs will boost prices for a wide range of consumer items, and how severely trading partners will retaliate with new tariffs of their own on imports from the United States.

The real question regarding Trump is how sensitive he turns out to be to stock-market declines. Trump has taken credit for a rising stock market dozens of times, and seemed shocked on Feb. 7 to discover stocks can actually go down while he’s in office. Yet Trump has flirted with policies, including protectionism and reduced immigration, that would probably do more harm than good for the economy and stocks. With the new tariffs, he has finally put a threat (or, if you prefer, a campaign promise) into action.

If Trump goes no further, and retaliatory measures from trading partners don’t escalate too badly, markets might quickly recover. Trump would probably boast that his tariffs are good for the economy, after all–even if that turns out not to be the case.

But if trade wars erupt or Trump imposes further protections–by dismantling all or part of the North American Free Trade Agreement, for instance–he could face a prolonged selloff that leaves investors wondering why he’s spoiling an otherwise splendid party. Even with recent downturns, stocks are still up about 25% from the day of Trump’s election, partly due to Trump policies such as tax cuts and deregulation, and partly because the economy is simply doing well.

Nobody knows what Trump is going to do, but here are a couple guesses. First, he’s very sensitive to the direction of stocks, which he views as a kind of scorecard on his performance as president. If stocks went into a prolonged slump because of something Trump did, he’d be inclined to undo it. He has changed his mind before, after all.

But Trump may not be able to arrest a stock-market slide once it begins in earnest. Most analysts don’t think that will happen in 2018, but a bear market is more likely in 2019 or 2020, as the stimulus effect of the 2017 tax cuts peters out and the additional debt Uncle Sam is taking on to finance those cuts becomes more onerous. If the economy or the markets have an adverse reaction to those policies, there might not be any useful levers Trump can pull.

Shorter term, I’ll go out on a limb and predict that Trump stops tweeting about stock-market declines. Pundits lampooned Trump after his Feb. 7 tweet, depicting him as naive about the way markets work. If Trump is sensitive to anything, it’s his image and his popularity, and he doesn’t like to seem like a rube among sophisticates. He may have learned you can’t beat the stock market, not even on Twitter.

Confidential tip line: Encrypted communication available.

Read more:

Rick Newman is the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Follow him on Twitter: @rickjnewman

Follow Yahoo Finance on Facebook, Twitter, Instagram, and LinkedIn