NEW YORK (Reuters) -Investors are recalibrating how to play U.S. President Donald Trump's whipsawing policy changes, weighing that a so-called "Trump put" supporting stock market prices may be fading and that his administration is more keenly focused on the debt markets.
Investors had bet strongly that Trump's agenda to lower taxes and usher in deregulation would support risk assets in a similar way to his first term when he frequently touted the stock market's performance.
The so-called "Trump put," which refers to options, assumes that he will do whatever possible to keep the stock market happy.
However, since returning to the White House on January 20, Trump's rapid-fire tariff policies have rattled risk markets, dented consumer and business confidence, and raised fears that his second term may not be as market-friendly as expected. Indeed, while stock investors struggle, the bond market has emerged as a key focus for the administration.
"Trump has been a long-time advocate for using the stock market as a metric for the health of the economy, so this is a fairly drastic shift," said Ben Harris, vice president and director of economic studies at Brookings, who recently served as chief economist at the U.S. Treasury Department.
In Trump's address on Tuesday to Congress, he pointed to the country's drop in Treasury yields but made no mention of stocks as he talked about his first six weeks back in office.
"Today, interest rates took a beautiful drop - big, beautiful drop - it's about time," Trump said on Tuesday. "And in the near future, I want to do what has not been done in 24 years: balance the federal budget - we're going to balance it."
That contrasted with 2017 when Trump addressed Congress and boasted that the stock market had gained almost $3 trillion since his election.
Treasury Secretary Scott Bessent has meanwhile pledged to lower the U.S. Treasury 10-year yield, which influences borrowing costs for both the government and consumers.
Moreover, the administration's mix of revenue-generating tariffs and aggressive spending cuts through Elon Musk's Department of Government Efficiency suggests a keen awareness of the risks posed by mounting government debt, which, if unchecked, could trigger a bond market rout.
"In the first term, we all said Trump was very SPX sensitive, and that was invariably the truth," said Dawn Fitzpatrick, CEO and chief investment officer at Soros Fund Management, referring to the S&P 500 index.
Bessent and the administration have a different level of pain tolerance when it comes to the stock market, Fitzpatrick said at a Bloomberg investment conference in New York on Tuesday.
"They're more sensitive to a broader set of asset classes, and I think that might mean that ultimately they have more levers to pull when and where they need it," she said. "What you can’t control is consumer confidence and corporate confidence and I think that is what is falling off a cliff right now."
The S&P 500 has tumbled more than 3% since Trump's inauguration, compared to a 1.5% decline in an MSCI index tracking global stocks. The 10-year U.S. Treasury bond yield, which moves inversely to prices, has fallen about 40 basis points, a sign investors are seeking safety.
On Tuesday, stocks had dropped after Trump imposed new 25% tariffs on imports from Mexico and Canada while doubling duties on Chinese goods to 20%. They pared losses on Wednesday as trade tensions eased, with the White House saying Trump would exempt automakers from his tariffs on Canada and Mexico for one month.
Trump has warned tariffs may bring short-term pain but will ultimately revive manufacturing and spur growth. Investors, however, worry that with weakening consumer confidence they could put excessive pressure on stocks and strain the economy.
"As an administration, you're kind of playing with fire here," said George Cipolloni, portfolio manager at Penn Mutual Asset Management. "You don't want to plunge the economy into a recession just to get the 10-year yield down."
Asked how President Trump factors in stock market concerns when it comes to tariffs, White House Press Secretary Karoline Leavitt said on Wednesday Trump supported tariffs as a key tool to raise revenue, reduce debt, and spur domestic job growth.
She said Trump’s first term saw a booming stock market, and he expects the same again, but that a broader economic approach that includes tax cuts, tariffs, deregulation, and lower energy costs will benefit both Wall Street and Main Street.
ROOM FOR TAX CUTS
Other investors echoed those concerns, especially after recent disappointing U.S. economic reports on consumer confidence, business activity, and retail sales.
"Declining consumer confidence and uncertainty in the market is not very positive, and that's when something unexpected happens in the market," said Stephen Dover, chief market strategist at Franklin Templeton Institute.
The stock market is still important for Trump, but he is "trying to get there through the Treasury (market)", he added.
Efforts to trim the budget could be aimed at creating room for tax cuts, a key Trump policy, which implies possible benefits down the road, said Tim Murray, capital markets strategist at T. Rowe Price. "When you want to get rates down, it's harder for that to coincide necessarily with the stock market going up."
Despite sharp declines, U.S. stocks remain around the levels at Trump's November election victory, when markets were rising on expectations of deregulation and pro-growth policies.
While tariffs have sparked fears of prolonged trade wars, many question how lasting they will be. Some see them as a bargaining tool for better trade terms.
"My hunch is Trump ... is not going to want to shock the market," said Mark Hackett, chief market strategist at Nationwide.
(Reporting by Davide Barbuscia and Carolina Mandl; editing by Megan Davies and Richard Chang)
