Trump and the market narrative

Published in The Sunday Times on 23rd March 2025.

I’ve been working in financial markets for a long time. Influenced many years ago by Nassim Taleb’s wonderful book, Fooled by Randomness, I accepted the premise that stock market prices drive the narrative and not the other way around.  

In what Taleb would refer to as “a post-hoc rationalisation”, we create narratives after market movements happen, trying to explain them in a way that makes sense. Stock market prices fluctuate for many reasons—some fundamental, some psychological, and some purely random—but we tend to construct stories around them, an exercise that lends support to the idea that markets are predictable.

However, in the post-Trump election environment I’m wavering in this belief. While most market moves are noise wrapped in narrative, Trump's tweets, policy decisions, and trade war rhetoric are having a direct influence.

But the influence they are having in many cases are counter intuitive. Canadian, Mexican and European equities are all outpacing the S&P 500 this year. So too are Chinese technology stocks. The dollar has weakened, bond yields are falling on growth concerns and the share prices of the Magnificent 7 big tech companies have reversed course and turned into laggards. About the only predictable outcome so far this year, is the strength of the Russian rouble. 

The decline in US stocks and under-performance, relative to other countries, reflects a remarkable turnaround in investors’ views about the economic outlook for America and Europe, and to some extent, China. 

Can this be attributed entirely to Trump, or to bearishness about the economy? In past growth scares (2022), the Magnificent 7¹ were seen as relatively insulated because of their strong balance sheets, high margins, and secular growth trends. This selloff has been driven mostly by valuations, as investors have rushed to unload stocks that look expensive. Defensives have been doing well, especially in healthcare and staples—so this looks a lot like a dash to safety. 

This is exactly Taleb’s point. Market movements are driving my attempt to provide a coherent narrative. As I’m genetically predisposed to, I’m trying to find some order in the chaos. But when stock markets get panicky, analysis can only take you so far. Emotions tend to be to the driver and logic takes a back seat. Sometimes it’s not even in the vehicle (we are not there yet).

In reality, randomness, shifting narratives, and to some extent, reflexivity probably explain more than any clean-cut fundamental reasoning. That doesn’t mean there’s no playbook, we have seen similar episodes before. Sell-offs are a constant feature of stock markets. Intra-year losses for European equities according to JP Morgan have averaged over 15% every year for the last 45 years, yet the market managed positive returns in 34 of those calendar years. Every one of those drawdowns seemed like the end of the world at the time. It’s true; to get to the long term, you have to survive several short terms. 

Unfortunately for most of us, price changes hijack psychology. We are wired to react to movement. When prices swing wildly, it feels like something must be happening, even if the business itself hasn’t changed. Share prices are far more volatile than is justified by the changes in the underlying fundamentals of a business. Be mindful that when investing in a fund or an ETF, it’s a collection of businesses you are buying—the fundamentals matter and don’t change as much as prices. 

Liquidity creates illusion of instant feedback—public markets offer you a new valuation every second. This tricks investors into thinking they need to react, even when fundamentals are unchanged. That’s not to deny the possibility that price changes can drive fundamental change through the process of reflexivity that George Soros was an evangelist of. Sometimes, enough people believing in the price move can make it self-fulfilling. There are incidences of high reflexivity, e.g. banks during a crisis or the meme stock phenomenon. But I think we overestimate this.  

Of course this doesn’t mean we can be blithe to the fundamentals. In fact, given the markets proclivity to lurch from one narrative to the next, good discipline would dictate that we should take advantage of the volatility. In some respects, the reassessment of European equities is long overdue; having underperformed for so long, they were probably a bit too cheap. Even if the market is over-excited about the prospects for fiscal largesse in Germany, or the potential fillip from a peace dividend—the fundamentals look attractive. You can lean into this knowing that at least the odds are tilted in your favour for an above average long term return. 

US exceptionalism may well have its limits—but be prepared for many twists and turns in this tale. And it is a tale without a conclusion. Taleb is right; the market is set up to fool us. We will look back in a couple of years with a clear explanation of what’s currently going on, but it won’t be worth much to us by then.

¹The Magnificent 7 are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. 
  

Source: Data is sourced from Bloomberg as at market close 31st December, returns are based on total indices in local currency terms, unless otherwise stated.

Gary Connolly is Investment Director at Davy. He can be contacted at gary.connolly@davy.ie or on X at @gconno1.