At the time of writing, President Trump had postponed the implementation of higher tariffs but had also sent letters to several countries outlining plans for new tariffs. And the markets? By now, the default is closer to a yawn than a yelp of panic.

As the FT’s Robert Armstrong puts it in the Unhedged newsletter, “why would markets panic about any administration pronouncement at this point? Even the agreements that have been made appear wide open to further negotiation”.

However, Armstrong raises a cautious note. While don’t know the outcome of these tariff decisions with any certainty, markets “seem to have reached the conclusion that moderate tariffs … won’t matter much to economic growth or profits, or they will be softened if they do”. And that’s not to mention the ongoing risk of higher tariffs. Is the market being too complacent?

Mixed signals

The notion that everything is already priced in is further complicated by Torsten Sløk’s daily commentary, the ‘Daily Shot’. He points out that the US bond market is pricing in a rate cut, anticipating a decline in growth. While cyclical stocks are trading higher than defensive stocks, anticipating higher growth. As Dr Sløk sums it up, in a post entitled ‘Inconsistent Markets’, “either the bond market is wrong, and rates must move higher due to accelerating growth. Or, equity markets are wrong, and stocks have to move lower because growth is slowing down.” (See the Daily Shot for the corresponding chart.)

So, markets are sending conflicting signals and investors have become shocked into complacency (or exhausted into indifference). The stakes could hardly be higher, and yet many seem resigned to waiting it out, caught between uncertainty and the confident belief that the market will force a correction. Could this paradox of reflexivity, where investors’ expectations influence market outcomes, which in turn reshape those very expectations, creates a feedback loop that can both mask risks and sow the seeds for sharp adjustments?

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