Don't underestimate the power of the "Trump put."
Analysts say the stock market has been hanging in after trade talks with China hit a rough spot because investors believe a deal is coming, and they also expect President Donald Trump to take action if the stock market looks like it is heading for a real meltdown.
The put is the belief that Trump will not let the stock market collapse, since he views it as a measure of his own success. On Friday, stocks cut steep losses and turned positive, after Treasury Secretary Steven Mnuchin said talks with Chinese Vice Premier Liu He were "constructive," as they ended for the day.
Several hours later, Trump tweeted that the talks were constructive and that he has a good relationship with Chinese President Xi Jinping. That sent stocks even higher, and the Dow, down more than 350 points during the day, closed 114 points higher to 25,942. For the week, the Dow was down 2.1%.
Analysts say stocks could contain losses, as long as investors believe the U.S. and China are moving toward an agreement rather than an escalating trade war.
"Trump was effective in helping the markets when it came to tax policy in 2017 and now in coming to an agreement with China," said Peter Boockvar, chief investment officer at Bleakley Advisory Group. "Every time he talks about talks going well with China, that's what the markets want to hear. If he says something good, the markets are going to rally."
Talks between Liu and U.S. officials ended just before noon Friday. After Mnuchin's comments that talks were "constructive," markets were waiting to hear more — and Trump delivered. Traders are concerned about the uncertainty of how China might respond to U.S. tariffs over the weekend, and say markets could be volatile around that on Monday.
"What you now expect is some kind of Chinese retaliation over the weekend. I think you have a weak Monday," said Andrew Brenner of National Alliance.
Trump's trade skirmish with China took stocks from a record high last Friday to now a weekly loss. The S&P 500 is down 2.2% in its worst week since December. But unlike the December sell-off, this one-week slide has to do directly with White House policy, as opposed to recession fears or worries about Fed policy that slammed the market last year.
Willing to sacrifice?
The question now is whether the president's willing to sacrifice some market gain.
"I think there's a lot of faith that he doesn't want to do things that will be too damaging to the stock market. But on the other hand, he is committed to changing the trade relationship with China," said Ed Keon, chief investment strategist at QMA. "Some of the tweets today, when he talks about how well the market has done do suggest he may be able to tolerate some downside to attain a policy goal."
Following a group of tweets about China and trade Friday morning, Trump tweeted that 401(k) retirement funds have soared 466% since the market bottomed in 2009.
The president also tweeted that he is not in a rush for a deal and that China should not renegotiate deals at the last minute.
U.S. stock futures rose early Friday, even after the U.S. moved forward to raise tariffs to 25% from 10% on $200 billion in Chinese goods. Strategists point to positive sentiment from China, where state funds were reported to be buying the market, pushing the Shanghai composite up 3%.
But by morning, Trump tweeted he was in "no rush" to strike a deal. That took the air out of the market, and more selling kicked in after the opening bell.
"I think the market is of the belief that it's more likely than not, there's going to be a deal. Until that confidence is shaken, the market will do what it's going to do. We had a decent pullback here, so I think the markets aren't panicking now because it's still possible there's a deal," Boockvar said.
Boockvar said the "Trump put" has been in the market, but at the end of the day Trump can't control the course of the stock market though he has made the right comments at the right time. "He tweeted the Saturday before New Year's Eve that trade discussions were doing great," Boockvar said. "He tweeted that and because it was a concern, we had a rally."
"The only concern he can alleviate now is are we having a deal or not having a deal? The markets don't like Mr. Tariff man," Boockvar said, referring to a name Trump gave himself.
The deal is important to both countries, so strategists expect there ultimately to be some agreement. Trump is also heading into an election, and the theory is he would like a trade deal that would help the economy, not a trade war that would hurt growth and the stock market.
"We expect both countries will come to the table. There's always been a hard line taken by the president on issues. He's very vocal. I think the market has been conditioned to that. If the market is taking this in stride a little bit, then it's likely they believe there will still be a deal in the not-too-distant future and we would not get tariffs on the other $300 billion."
Trump has said he was going to get the paperwork started on another round of tariffs, on $325 billion in Chinese goods, and the fear is that would hurt the economy since the tariffs would be directly on consumer goods.