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Donald Trump’s former adviser, Steve Bannon, once described the US president’s media strategy as “flood the zone”. In other words, inundating the public with information to distract, confuse, and deter scrutiny.
Is this tactic affecting the stock market too?
In a stable policy environment it is easier for investors to value equities as economic fundamentals — including demand, costs and rates — can be projected with some confidence. However, Trump’s widespread protectionist agenda has pushed uncertainty towards all-time highs, according to the US economic policy uncertainty (EPU) index, which aggregates newspaper mentions of key terms.
His “reciprocal” trade tariffs are set to be imposed on August 1. But by constantly shifting deadlines, fiddling with duty rates and linking levies to open-ended negotiations, he has made it hard for investors to mark assets to market.
The Vix index — a measure of stock market volatility known as Wall Street’s “fear gauge” — tends to correlate with the EPU. Since January, however, the two have decoupled: uncertainty has shot up but the market’s pricing of volatility has been comparatively tame. The last time a similar divergence happened was Trump’s first term.
A study by academics at Booth Business School in 2017 concluded that markets had failed to react to uncertainty because White House messaging was “unreliable and difficult for investors to interpret”.
The S&P 500’s resilience today, despite falling growth forecasts, tariff threats and fiscal instability, may reflect a similar difficulty in pricing policy risk. Information overload may also help explain the stock markets’ seemingly contradictory outperformance.
Indeed, on Monday, the S&P 500 hit fresh highs, even though the US effective tariff rate is around seven times higher than it was last year and is set to return closer to levels that initially caused the main equity benchmark to drop below 5,000 after “liberation day”. Today, it is almost 30 per cent higher.
How the White House delivers its messages may be important here. In particular, Trump’s habit of reversing “bad” policies could be helping to pump the market higher.
People tend to prefer known risks to unknown ones — a trait known as ambiguity aversion. We also weigh losses more heavily than gains, which means avoiding a loss can feel like a win.
“It does feel like the walking back of a threat is better for stocks than the threat itself is bad,” says Neil Dutta, head of economics at Renaissance Macro Research.
One example of this was in late April when Trump attacked Federal Reserve chair Jay Powell, declaring that his termination “cannot come fast enough”. Days later, the president claimed he had “no intention of firing” Powell. The S&P 500 jumped well above the initial trough caused by his threats.
A September 2024 Journal of Finance study supports this theory. It found that when small pieces of information are consumed often, our beliefs become less accurate and more sensitive to recent signals — compared with when the same data is digested all at once.
Investors clearly assessed April’s chunky “reciprocal” tariff announcement as bad news for the US economy, triggering a sell-off in US stocks and Treasuries, which forced their postponement.
But right now, investors may be putting greater weight on more recent positive tariff developments: reductions, delays and deals. The “Taco” trade is a subset of this. A stream of sturdy second-quarter earnings may also encourage the bulls, even if the pain of higher tariffs is still filtering into the economy.
This means relative changes in tariff rates may resonate more than the absolute increase since the start of the year. “A series of low-grade shocks is much harder for markets to price than one big shock,” warns Freya Beamish, chief economist at TS Lombard. “But the frog is still being boiled.”
That US stock markets are trading at historically rich valuations at a time when import duties are close to their highest in a century (and when rates could remain elevated) is unsettling.
While optimism around AI and tariff resilience are both driving the S&P 500 higher, noise is undoubtedly complicating price discovery. Sooner or later economic reality will catch up. Flooding the zone can delay a reckoning — but it can’t prevent one.
tej.parikh@ft.com
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