(Bloomberg) — In the first weeks of the year, the political landscape has shifted in ways that once might have rattled global markets. A foreign leader was captured. The Department of Justice opened a probe into the Federal Reserve. And a disruptive White House intervened across fresh swaths of US commerce.
But rather than recoil, markets have rocketed up — an extension of the risk-taking bravado that has long provided cover for President Donald Trump’s aggressive policy playbook.
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January inflows into equity-focused ETFs are running at five times the average for the month, with the funds attracting a record $400 billion over the past three months, a sign of just how aggressive risk appetite has become. Leveraged-long ETFs now hold $145 billion in assets, compared with just $12 billion in funds that bet on market declines. Cash allocations have dropped to record lows, according to Bank of America Corp. Credit markets are behaving as if it’s 2007, while risk premiums to hold junk bonds are tightening even as corporate borrowing ramps up.
A market this confident is generating little friction for a White House increasingly willing to test boundaries. In the view of some, it may even be encouraging it.
“The president is very much using the markets as a scorecard right now, and that scorecard — from the president’s point of view — says he’s winning,” said Mark Malek, chief investment officer at Siebert Financial. “This would all certainly prompt the administration to try to extend its winning streak by going deeper into that section of the playbook that it hasn’t up until now. In other words, expect the unexpected.”
The dynamic cuts both ways. Last April, world markets did react sharply — pulling back in response to a threatened wave of tariffs that would have roiled global supply chains. The S&P 500 promptly plunged, spurring the administration to roll back its protectionist push. It was one of the few moments in Trump’s second term when investor backlash appeared to temper policy impulses in real time.
But today’s shocks are treated largely as noise — helped by the belief, among some investors, that a serious market revolt would prompt the White House to retreat just as it did in April. In the meantime, capital continues to chase themes tied to artificial intelligence, industrial recovery and a rebound in cyclical demand.
That economic optimism is visible in how investors are positioned. The equal-weighted S&P 500 ETF has outpaced its cap-weighted counterpart so far this year, while one major fund tracking the less-concentrated index pulled in $3.7 billion in fresh inflows. The Russell 2000 advanced 2% on the week, extending its outperformance against the S&P 500, which posted a small loss. The moves reflect investor bets that economic strength will lift more than just the largest technology stocks.
“We are seeing growth without inflation pressures. The economy is on solid footing at a time when inflation is still behaving,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “I suspect there’s a little bit of FOMO going on as well given the time of year.”
A run of stronger-than-expected economic data has helped shape a growing sense that conditions are improving just as more signs emerge that inflation is continuing to ease. From jobless claims showing resilient labor markets to production at US factories unexpectedly increasing in December, economic data continues to fuel investor risk appetite.
The shift in sentiment is also apparent in the options market. Even as the administration proposed capping credit card interest rates, escalated rhetoric toward Iran and seized Venezuelan oil assets, the VIX, a measure of expected stock-market swings, sat in the 17th percentile of its five-year range. Very low, in other words. Skew, the premium investors pay to insure against sharp declines, remains below average even as policy uncertainty mounts. Meanwhile, demand for downside protection, such as index puts or tail-risk hedges, remains low.
“Investors have been so well-rewarded to ignore geopolitical risks that at this point, they will need to see something incredibly tangible to shake their confidence,” said Peter Atwater, founder of Financial Insyghts.
To be sure, not every move coming out of Washington is viewed as a threat. Venezuelan oil, if redirected through Western channels, could help ease global supply constraints. A credit-rate cap might bolster lower-income household spending in the short term. But the broader effect is striking: with risk assets rising and volatility compressing, the White House appears to be operating in a zone of unusually low market constraint.
The risk is not necessarily that any single policy move will misfire. It is that the market’s willingness to absorb a succession of shocks may itself reflect positioning that has grown too one-sided. When every participant is leaning in the same direction, even small shifts in sentiment can produce outsize moves.
Even among those whose positioning remains more cautious than headline indexes suggest, a sharp enough pullback would likely be met with buying.
“There’s a decent contingent of institutional investors, at least, who would hedge given downside confirmation — the same cohort who got whiplashed on April 2 probably remains more bearish than the market reflects,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “They’d likely pile in if we got a multi-standard-deviation-type selloff.”
—With assistance from Molly Smith, Amara Omeokwe and Christopher Anstey.
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