Wall Street is betting the president won't let stocks collapse - CNN

Even after the recent tumble, the S&P 500 is sitting just 6% away from all-time highs. And the VIX (VIX) volatility index is hardly flashing panic.

One major factor: Investors know that President Donald Trump is very focused on swings in the stock market. There's a widespread belief that Trump won't let anything truly bad happen to stocks before the next presidential election.

Wall Street is betting that if the market plunges far enough, the White House will throw in the towel and find a way to make trade peace with China rather than risk losing in 2020.

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"If the pain gets too great in the economy and stock market, he will have to find a face-saving solution," said Carter Mack, president and co-founder of JMP Group, a San Francisco-based investment bank.

'Security blanket'

It's a new spin on the Fed put, the term coined for a trading strategy based on the belief that the Federal Reserve will come to the rescue of markets and the economy by lowering interest rates.

The Trump put is a bet that the president won't allow the market to collapse.

"There is a security blanket," said Jeff Kleintop, chief global investment strategist at Charles Schwab. "It certainly seems this administration is more reactive to the stock market."

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Trump checks financial markets "every few hours," according to Stephen Moore, a Trump campaign adviser.

"He understands that if the stock market and economy crash on him, there's no way he can get re-elected," Moore said earlier this month at the SALT Conference in Las Vegas.

Retaliation jitters

Financial markets have wobbled in recent weeks because of concerns about the escalating trade war between the world's two biggest economies.

Jittery investors have poured money into bonds. That's driven the 10-year Treasury yield down to the lowest levels since late 2017.

Trump has threatened to impose tariffs on all remaining US imports from China. And Chinese state media has floated the potential for harsh retaliation, including restricting imports of rare-earth minerals or even dumping Beijing's vast holdings of US Treasuries.

Investors are hoping Trump and Chinese President Xi Jinping make progress on trade negotiations at next month's G-20 summit.

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Ryan Nauman, market strategist at Informa Financial Intelligence's Zephyr, warned that a "complete breakdown" of US-China talks could cause US stocks to plunge 10% to 15% from current levels.

"That won't bode well for Trump and his reelection probabilities," said Nauman. "I do think that will put pressure on him to get a deal done."

Facing economic and market turbulence, Trump and Xi reached a temporary trade truce in late 2018 in Argentina.

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However, analysts warned against assuming that Washington and Beijing will automatically reach a face-saving deal this time.

"Usually it's the market and economy that drive political outcomes, rather than politics driving market outcomes," said Kleintop. "There's a limit to what the president can do."

One risk is that Trump decides picking a fight with China is popular enough politically to overshadow the economic fallout.

Another potential problem is that Trump may opt for a deal -- only to rebuffed by Beijing.

"China is digging in its heels," said Kristina Hooper, chief global market strategist at Invesco. "It seems China is very focused on teaching the US a lesson."

In other words, Trump may not be able to simply flip a switch to make the trade war go away.

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