As President Donald Trump kicks off the second year of his second term in office, the geopolitical- and tariff-related volatility that characterised his return to power has resurfaced to shake markets. Investors who have been conditioned to asset prices swiftly rebounding are worried that this time, there could be more lasting damage.
Volatility measures across asset classes rose while stocks, US long-dated Treasuries, and the US dollar sold off on Tuesday, a day after Trump threatened to rekindle a trade war with Europe over the US administration’s aim to take over Greenland, threatening to blow apart the political and military alliance that has underpinned Western security for decades. The threats have revived talk of the Sell America trade that emerged following last year’s “Liberation Day” tariff announcement in April, with investors shying away from US assets. “Global investors are taking these threats seriously,” said Jack Ablin, founding partner and chief investment strategist at Cresset Capital.
“I would have thought after Liberation Day that a lot of investors would fade the selloff and try to pick a bottom, but that doesn’t appear to be happening this time around,” he said.
While Trump has shown flexibility on tariffs when markets come under severe pressure, investors worry it might take significantly more volatility before the situation over Greenland is resolved. Indeed, the selloff concerned investors because it was spread across multiple assets.
“A day like, where the bond yields are up, equities have fallen and the dollar sells off ... causes people to rethink some of their assumptions,” said Lauren Goodwin, head of the global market strategy team at New York Life Investments. On Wednesday, Trump ruled out the use of force in his bid to control Greenland, but said in a speech in Davos that no other country can secure the Danish territory. US stocks and the dollar recouped some of the losses from the prior session. “This is a time where everything is priced near perfection and it’s a time where you can take out some insurance or think about some defensive options just in case another geopolitical event hits the headlines,” Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments, said. Still, few investors were ready to back away from US stocks in a big way. “At the margin, I think it makes sense to diversify assets outside the US, but I wouldn’t give up on the US at all, given the very strong profitability of US companies,” said Michael Rosen, chief investment officer at Angeles Investments.
With companies reporting fourth-quarter results over the coming weeks, S&P 500 earnings are expected to have climbed 13.3% in 2025 and to rise by another 15.5% in 2026, according to LSEG IBES. Still, should foreign investors shed US stocks, it could weigh on the market. “The fundamental story is a good one, but there’s a supply and demand aspect, and that is some of the foreign flows might not come into the US and so, as a result, this could dampen returns,”
One reason investors are not quite bolting from stocks is the possibility of Trump negotiating back from his opening position. “I definitely think traders are worried about going all in on a down trade because of the potential for a ‘TACO,’” said Tom Graff, chief investment officer at Facet in Phoenix, Maryland, referring to the Wall Street acronym for “Trump Always Chickens Out” – what some say is Trump’s tendency to amp up threats only to later back down.
With a “very large” non-dollar allocation and significant underweighting on longer-term Treasury bonds, Facet’s Graff did not see an immediate need to react, he said. Any pronounced pullback in the market could also draw dip-buyers, investors said.
“Is this the next TACO trade where he (Trump) stirs things up and then he backs off? Certainly you’re going to have some number of investors out there who might view it that way,” said Jim Carroll, senior wealth adviser and portfolio manager at Ballast Rock Private Wealth in Charleston, South Carolina. — Reuters