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James David Spellman

The sharp fall in US share prices underscores why financial markets will be US President Donald Trump’s greatest nemesis.
Recession fears are back in play amid aggressive, stop-start trade wars which economists increasingly forecast will rekindle inflation. Investors’ behaviour promises to thwart Trump’s agenda, just as they have forced past administrations to scramble for rescues during the dotcom bubble bust and the global financial crisis.
Executive orders, admonishments, arm-twisting and social media campaigns by the White House will eventually prove powerless against the emotions and cognitive biases that influence securities markets. Our beliefs create the outcome we expect to see. We blindly trust intuition and believe in our infallibility – these are some pitfalls that plague decision-making.
Economic policies affect how we save, invest and spend our money. They also have an impact on our emotions, which in turn influences our decisions. For companies, the fear of incalculable turmoil can postpone or disrupt investment plans that generate dividends and jobs. Experience-based beliefs, however distorted, can supplant rationalism.
Uncertainty over Trump’s policies has spooked markets and unnerved investors. According to Google Trends, interest in the term “recession” in the United States surged nearly tenfold between February 9 and March 9.
It’s hard to find meaningful information buried deep in the ocean of irrelevant data. As Marc Lasry, the billionaire co-founder of Avenue Capital Group, put it earlier this month: “The problem for the markets is when they don’t know what to do. An economy can’t survive like that. It just slows everything down and could push this economy into a recession.”

Efforts to understand these dynamics began with Adam Smith, the Scottish economist and philosopher most remembered for his notion of the “invisible hand”. We attain prosperity together only if each of us acts in self-interested ways within a system based on transparency, fair play and consistent property rights. Therein, he declared, lies the wealth of nations.
Less well-known are Smith’s observations that humans tend to be overconfident, which he called the “overweening conceit which the greater part of men have of their own abilities”. He also noted how we tend to overestimate our gains and underestimate our losses.
Daniel Kahneman deepens Smith’s insights in his 2011 book Thinking, Fast and Slow. Kahneman saw our minds operating at two levels: fast, which is intuitive, automatic and reliant on mental short cuts to decide quickly but prone to errors, and slow, which is deliberate, analytical and more dependent on cognitive effort. We prefer to operate in the fast lane as there is less angst and quicker self-gratification.
We have another limitation – what the Nobel Prize winner Herbert Simon calls “bounded rationality”. Our ability to gather, process and store all information we need to make rational decisions is limited. Instead of striving for the best outcome, we often settle for a good-enough solution.




These human quirks fuel market volatility, as we have seen when fear grips the market. Investors become irrationally aggressive. Stocks are sold in a panic. We join the herd, regardless of whether it’s wise to do so. Events snowball. We cull information to confirm our biases, however wrong-headed they are. We give disproportionate weight to recent events and ignore historical trends. All this leads to miscalculations in risk assessments and investment decisions.
Distress signals are now flashing. In February, US consumer confidence registered the largest monthly decline since August 2021, according to The Conference Board. The University of Michigan’s closely watched index of consumer sentiment nosedived 11 per cent to 57.9 in mid-March from 64.7 last month. Americans are growing pessimistic about future business conditions, their income growth and employment prospects.
The reverse might be taking place in China, according to a recent survey by Deutsche Bank. Some 54 per cent of respondents polled this quarter said they felt financially better off than a year ago, up from 44 per cent on average last year. Those anticipating an income increase in the year ahead rose for the second straight quarter to 60 per cent, though household expectations for the property sector remain pessimistic.
Yet consumer confidence has not been strong enough to lift China’s struggling economy. Last week, a worried Beijing announced ambitious plans to spur consumption by boosting pay and reducing financial burdens in its latest attempt to gin up positive vibes. China’s leaders are up against the same behavioural dynamics that are Trump’s nemesis. Sentiment in China plays a pivotal role in determining whether the country’s stimulus plan will succeed.


The actions of Washington and Beijing show that government leaders are prone to the same cognitive biases as the people they govern. They are navigating forward using a rear-view mirror. They do not fully understand how their policies are framed and perceived by the public, however misguided those perceptions may be.
By the time asset prices go into free fall and recession occurs, policymakers could be moved to chart a different course. Invariably, though, the responses are too late. But even when that time comes, whether by simply lowering interest rates or implementing other commonly used stimuli, the fixes might not be enough to revive the economy if consumers remain too fearful and distrustful.
As journalist Jason Zweig wrote in a commentary in Benjamin Graham’s The Intelligent Investor, “markets will most brutally surprise the very people who are most certain that their views about the future are right”. For Trump, that surprise is likely to be how markets will be his greatest adversary.


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Illustration: Craig Stephens

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US Commerce Secretary Howard Lutnick gestures to reporters as he enters the White House on March 13. He has said President Donald Trump’s tariffs are “worth it” even if there is a recession. Photo: EPA-EFE

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Chinese Premier Li Qiang at the closing session of the National People’s Congress at the Great Hall of the People in Beijing on March 11. Photo: AFP

Opinion

World Opinion

Economy

Global Economy

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News

Investors’ behaviour promises to thwart Trump’s economic agenda, just as they have forced past administrations to scramble for rescues


Investors’ behaviour promises to thwart Trump’s economic agenda, just as they have forced past administrations to scramble for rescues.


China economy

China consumption

Consumers

Stocks

Donald Trump

Banking & finance

Investing

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


Trump’s executive orders will be no match for markets in grip of fear

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Investors’ behaviour promises to thwart Trump’s economic agenda, just as they have forced past administrations to scramble for rescues

Investors’ behaviour promises to thwart Trump’s economic agenda, just as they have forced past administrations to scramble for rescues