The Greatest Bull Trap Of All Time?

After Donald Trump paused the tariffs he had announced on "Liberation Day" in early April, the stock market quickly rebounded and is now near all time highs. However, this rally may be deceptive. Trump’s negotiating style follows a recognizable pattern: he makes aggressive, maximal demands and then backs down. This "two-step" approach is now being mocked with the acronym TACO ("Trump Always Chickens Out"), accompanied by a flood of taco- and chicken-themed memes. However, this public ridicule carries risks: Trump has repeatedly shown that he reacts sharply to personal attacks. Therefore, persistent mockery could encourage him to not "chicken out" and ignore stock market turmoil next time. Just a few weeks ago, Trump and his advisers emphasized that they are calm about stock market corrections because they barely affect their MAGA base.

On May 30, Trump escalated the situation by accusing Beijing of violating agreements and raising tariffs on steel and aluminum to 50 percent. Meanwhile, Trump touts lower-than-expected inflation as proof of the soundness of his policy. However, Beijing is unlikely to be intimidated. Many Chinese exporters rely on the U.S. market. If push comes to shove, though, factory closures in China may result in less social unrest than empty store shelves and falling stock prices in the United States, where a market slide could erase the retirement savings of millions of Americans. Additionally, Beijing controls nearly 90 percent of the global production of rare earth elements — a lever that should not be underestimated.

For corporations, Trump’s erratic policies mean constant uncertainty in planning. The cycle of accusations, tariff threats, de-escalation, and renewed escalation sabotages investment decisions. Higher tariffs harm foreign suppliers and U.S. firms that rely on inexpensive intermediate goods, reducing profit margins and calling the high valuation of stocks into question. The post-pandemic supply chain is fragile. It is wobbling once again. Meanwhile, core inflation remains stubborn. Rising wages, tariffs, and selective bottlenecks limit the Federal Reserve’s ability to cut rates, pushing the possibility of rate cuts far into the future. High financing costs restrain capital spending, consumer spending, and mortgages.

Interest rates directly affect real estate. High mortgage rates deter buyers, causing demand to decrease and sellers to hesitate to accept lower prices. If the market turns, builders and lenders, i.e., banks, could face severe stress. Meanwhile, a "white-collar recession" is taking shape in the labor market. Tech giants and service-heavy sectors, in particular, are laying off workers as automation and AI render certain skill sets obsolete. Layoffs and hiring freezes reduce middle-class spending. Meanwhile, credit card debt has reached record highs, and delinquency rates are rising.

Geopolitically, the global situation remains explosive. Ukraine's "Spider's Web" operation on June 1st represents a new level of escalation. A war between Israel and Iran could destabilize the entire Middle East. The threat of Chinese aggression against Taiwan poses a significant risk to global semiconductor supply chains, which would be disrupted by any conflict.

Against this backdrop, the recent market rally seems like a house of cards built on a single optimistic narrative. Even the slightest crack in this best-case scenario could trigger a wave of profit-taking and cause the recent rally to turn into a monumental bull trap.