Tuesday, January 20, 2026, the stock market closed significantly lower—the Dow Jones Industrial Average closed down 1.76%, S&P 500 down 2.06%, and the NASDAQ Composite down 2.39%. The US Dollar fell in value and US Treasury yields increased; investors were fleeing US investments, to entice them back the Treasury would have to pay a higher interest rate on its future debt obligations. This market activity is not in response to macroeconomic conditions. This is not even the first time we have seen markets move in this way in the past twelve months. This market convulsion was in direct response to Trump's threat of new tariffs on eight European countries as he escalated his pressure campaign for the US to gain control of Greenland. Two days later the stock market largely recovered it's losses after Trump announced the "framework for a future deal", resolving the Greenland issue of his own making.
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| Performance of three major indices from 1/1/2025 through 1/21/2026. Comparing actual performance against the trend the Dow ended the year 2.63% lower, the NASDAQ ended the year 3.88% lower, and the S&P ended the year 6.78% lower. Comparing actual performance against 2024 performance the Dow ended the year 3.4% lower, the NASDAQ ended the year 11.69% lower, and the S&P ended the year 10.36% lower. |
Many point to the market reaction for why Trump took this off-ramp, believing that the market remains one of the few constraints on Trump's executive action (despite his claims that his own morality is his only true limit). To be sure, there have been several instances through the past year where Trump reversed an earlier policy announcement because of the reaction in the stock market:
On February 20 and 21, 2025 the Trump administration announced they would be cutting 6,000 jobs from the IRS and 5,400 probationary workers from the Defense Department as the Department of Government Efficiency (DOGE) began eviscerating government agencies and laying off workers. The Dow fell 2.71%, the S&P fell 2.14%, and the NASDAQ fell 2.66%.
On March 4, 2025 Trump announces a 25% tariff on Canada and Mexico, only to announce a one month pause the next day resulting in a sell of and recovery in the three indices.
On April 2, 2025 Trump declared it was Liberation Day, unveiling almost universal tariffs at rates far exceeding what Trump had campaigned on. In the two days that followed the Dow fell 9.48%, S&P fell 10.81%, and NASDAQ fell 11.79%. Two days later the markets recovered most of their losses with the announcement of a 90 day pause o the Liberation Day tariffs.
On August 1, 2025 the 90-day pause expires and tariffs are imposed on more than 90 countries causing the Dow to drop 1.23%, the S&P to drop 1.60%, and the NASDAQ to drop 2.24%.
With the exception of Liberation Day, the market's reaction to each of these announcements was a shudder, not a full meltdown. Part of the reason for this is the TACO effect—Trump Always Chickens Out. April 2 the three major indices fall 10% over 2 days, but then quickly recover. When the 90-day pause expired and Trump reimposed those tariffs? A muted 2% slump. Five months later when additional tariffs are levied against eight European allies another 2% shrug.
The Market is pricing in that if there is economic pain then Trump will back down. However there is a deep paradox here. Ultimately the Market believes Trump will not commit economic self-harm, but in order to signal that his actions will in fact create that harm the Market has to eliminate wealth from the economy—i.e. inflict economic harm.
What's more, this is a dangerous and short-sighted gamble. Lets start with the danger as it will lead us into the short-sightedness. The Market is made up of a collection of actors from institutional investors to private investors, each of these actors are in one way or another betting on the success of individual companies, the future value of commodities, or stock indexes. They are operating within a defined system that has historically adhered to an agreed upon set of rules and it could be assumed that each of the actors within the system was acting rationally.
Now, however, we introduce Donald Trump into the equation. Trump reacts to inputs, but is far more driven by ideology than rational self-interest. That ideology being tariffs. Trump wants to impose tariffs, but he does not want to see the red arrow pointing down on the Fox News chyron. He really wants to impose tariffs though, so maybe he would tolerate a 1.5% drop in the market. This is how investors have to bet now; you do not want to sell too much too fast otherwise you would have sold off assets that you would have profited off of when the Market rebounds after Trump inevitably backs down. On the other hand...if you do not sell off enough, or fast enough, maybe Trump does not back down. Maybe the tariffs stay in place. And maybe it was not even worth the gamble because the real damage has already been done, we just cannot see it yet.
One of the most frustrating things about watching the TACO recoveries in the market is that the underlying issue causing the initial sell off in the market has not actually been resolve, and that underlying issue is Trump. Trump began his second term by slashing federal spending and laying off hundreds of thousands of federal workers, imposing high taxes on all imports, and targeted an entire segment of the labor force for deportation. Maybe the US economy could have endured one of these policies, but for all three to be imposed in quick succession is a shock.
One could argue that slashing the federal budget and laying off federal workers would ease a bureaucratic burden that, in the long run, would more than offset the loss in economic activity created by federal spending and in the process create more jobs than were eliminated. These sort of arguments do not exist for the other two policies though.
Immigrants are a significant proportion of the labor force in the construction, hotel and hospitality, and agriculture businesses. Very often working these jobs for wages below what American's would tolerate. To remove this labor pool from the economy will increase prices by decreasing supply while also increasing cost of labor which will ultimately be passed on to the end consumer.
Tariffs are simply a tax. This is a policy that could make sense if implemented in a targeted way to protect certain industries. That is not how Trump has implemented his tariff policy, taxing items like bananas and coffee that cannot be sourced in the United States.
It is worth pointing out Trump has not reversed course on his cuts to federal spending and workforce, but as mentioned there is at least a coherent argument that could be made for the economic benefit of these actions. Trump has also not changed tact on his immigration policies, quite the opposite actually as it seems he is accelerating his policies to target immigrants for deportation.
It is also worth considering the long-term economic harm of Trump's action on tariffs. Trump may lift or pause previously announced tariffs, resulting in a sigh of relief from the Market, but other players take notice and are making other arrangements. Our existing trade relationships with historic economic partners and allies are fraying as economies around the world seek alternative trade arrangements to avoid the added cost of doing business in America—a direct cost in tariffs, but also an indirect cost in the inability to conduct long-term planning because of Trumps erratic policies.
The Market has seemingly not yet priced in the cost that the alternative economic framework currently being constructed with America on the outside looking in while the American-led economic order is being dismantled will have on the American economy. Otherwise the market would not rebound with each tariff that is lifted or suspended, but instead sink lower with each new tariff imposed.
There is one other characteristic of the Trump economy that we have not yet addressed as the Market has not yet directly reacted. The Market has not yet reacted because there was no specific policy announcement or regulatory change, the the ways of doing business for Trump's executive office is a fundamental change from prior Presidents. The extent of corruption and self-dealing perpetrated by Trump is not merely regulatory capture or crony-capitalism, it is pay-to-play capitalism; which is to say, it is not capitalism.
At Trump's second inauguration, on January 20, 2025, the premier seats were reserved for Meta CEO Mark Zuckerberg, Amazon CEO Jeff Bezos, Google CEO Sundar Pichai, and Elon Musk. Also in attendance was Apple CEO Tim Cook and TikTok CEO Shou Zi Chew.
On August 6, 2025 Apple CEO Tim Cook presented Trump with a 24K gold plaque in return for exempting Apple from future tariffs.
In early September, while at a dinner attended by tech billionaires Meta CEO Mark Zuckerberg uncomfortably apologized to Trump saying, "I'm sorry. I wasn't ready... I wasn't sure what number you wanted to go with". Referencing his earlier answer for how much Meta planned to invest in the US over the next few years.
David Ellison would leverage his father, Larry Ellison's, relationship with Trump to usher Skydance's acquisition of Paramount through the regulatory bureaucracy. David would then acquire the Bari Weiss's Free Press and appoint Bari the News Editor in Chief of CBS News to further ingratiate himself with Trump in the hopes that Skydance-Paramount may be able to next acquire Warner Brothers-Discovery.
When Trump announced he would teardown the East Wing of the White House to construct a new ballroom companies lined up for the opportunity to donate to help fund the construction of Trump's ever-expanding vanity project.
This is by no means an exhaustive list of the corruption that has taken place over the past year. Elsewhere I have cited some of the other ways Trump has institutionalized and normalized his corruption, most notably his crypto-currency ventures.
Sure enough there is money to be made in a strong-man's economic system; Vladimir Putin and those around him are quite wealthy, the Russian economy on the other hand is rather small and fragile. What these business leaders fail to recognize and appreciate is that they are actively endorsing, and even participating, in the destruction of the economic system which they have so greatly benefited from.
Our economic system had glaring flaws; opportunities and risks were not evenly distributed allowing all American's participate equally, but it was a system that made us the wealthiest country in the world. The personalist system that appears to be replacing it will not generate the same level innovation, dynamism, or wealth. When economists have studied public corruption they have found that it leads to a severe constriction of economic growth.
Taken together, it seems clear to me that the Market, which is supposed to be the analytical and rational evaluation of future returns, has not yet fully priced in the cost of the Trump presidency.
