Wall Street has proved remarkably resilient in the face of instability, with US stock markets recovering from a March correction to reach near-record highs by mid-May. On 27 March, the Dow and Nasdaq entered correction territory, falling more than 10% from their peaks as oil prices climbed and war with Iran raged. Seven weeks later, the geopolitical situation had improved only marginally, yet stocks had not only recovered but were thriving.
The market's ability to shrug off shocks is well documented. It has absorbed the Covid-19 recession, generational-high inflation, Russia's invasion of Ukraine and repeated tariff spats under President Donald Trump. Although consumer confidence has crashed, the tech-heavy Nasdaq index has risen 11% since the start of the year, nearly half of its total gain last year, while the Dow and S&P 500 hover close to record highs.
Economists attribute this phenomenon to a belief that the president will back down from his most extreme policies – a theory dubbed “Trump Always Chickens Out”, or Taco. Examples include the postponement of “liberation day” tariffs hours after they were announced and the cancellation of threatened tariffs on eight EU countries. However, Eswar Prasad, a former IMF official and economist at Cornell University, argues that investor confidence predates Trump, noting that investors expect the Federal Reserve and the US government to intervene in any significant financial trouble.
Prasad warns that such intervention can hide risks, particularly as financial supervision weakens. He cites the collapse of Silicon Valley Bank and First Republic in 2023, which he attributes to ineffective oversight, and questions where risks are being hidden now. Meanwhile, inflation has started to climb again, reaching 3.8% in April, up from 2.4% in February, adding to the strain on household budgets.
The burden is unevenly shared, with a “K-shaped” economy emerging. A New York Federal Reserve report found that low-income Americans have reduced petrol usage amid the Iran conflict, while high-income Americans have not changed their consumption. The top 10% of income earners own 87.2% of US stocks, while the bottom half owns just 1.1%. This continued spending by the wealthy has kept companies profitable, even as other consumers cut back – but it also masks the fragility beneath the market's apparent strength.
