What a difference from three weeks ago when markets finished their most recent pullback on worries that the trade war was intensifying, that global growth (especially in Europe) was slowing, and that, once again, everything that could go wrong would. Then, the worry was that the decline would continue and worsen. Now, of course, with the ECB back in easing mode and the presumption that the Trump-Xi meeting signals the end of the trade war (why would they be meeting if not to sign a deal?), everything has changed.
In truth, the likely outcomes are not as bad as we thought then and not as good as we think now. Yes, the ECB may be easing, but that is because the growth fears are real. Yes, we might get a deal between the U.S. and China, but that will manage the conflict, not end it. Either way, the headlines will continue, driving new waves of buying or selling.
To be sure, markets have always reacted to the headlines. Recently, however, those reactions seem to be bigger and more frequent. I think there are two factors at work.
Policy has become more black and white. Historically, government policy has dealt in shades of gray. But the Trump White House has been more definite in both content and delivery. Now, tariffs are delivered explosively by tweet, rather than as a gentle hint in backroom trade talks. Policy conflicts have simply become more direct and more visible than they were before. This dynamic is something that might change with the next administration. For now, though, it has become the new normal. Expect it to continue.
Trends are starting to even out. Any changes, especially in systemic policy, now have proportionately more effect. When growth is strong, changes at the margin—in monetary policy, in trade—simply don’t move the needle that much against the prevailing trend. When growth slows, those changes—though no bigger in absolute terms—are proportionately more meaningful and generate more attention.
Although this situation is certainly unsettling, there is a positive effect as well. The more defined policy shifts and market reaction are a good gauge as to where the economy and markets actually are. Based on the data, the fundamentals remain solid, though softening. This set of reactions gives us another lens, in real time, as to what markets are thinking.
Right now, markets are clearly more cheerful. The recovery started with stronger consumer spending, which was a headline on its own and has now gotten a boost with the most recent headlines on trade and monetary policy. Although risks remain—and will no doubt show up in later headlines—the headlines today are showing that the risks are not as bad as feared. The market reaction confirms that.
When we talk about headline risk, we are often talking about the downside. Today’s events remind us that it can work both ways.