If financial conditions are restrictive, Wall Street sure hasn’t noticed. Stock indexes hit fresh records this week, and speculative meme stocks are back to mania levels. Meanwhile, smaller businesses in the non-financial economy are tightening their belts amid uncertainty over tariffs and the labor market.
Trump officials like to say their policies are focused on helping Main Street, not Wall Street. “Wall Street has done very well over the past few decades, and now it is Main Street’s turn to shine,” Treasury Secretary Scott Bessent said last month. In case he hasn’t noticed, Wall Street is doing great, Main Street not so much.
President’s Trump’s whipsawing tariffs have increased volatility in equities, fixed-income and commodity markets along with foreign exchange rates. Such fluctuations make it harder for businesses to invest and may mean they have to pay more to hedge financial risks. But the volatility has been a gold mine for Wall Street trading desks.
Financial industry news site Investment Executive reported this week that the largest U.S. investment banks recorded a 17% aggregate increase in trading revenues in the second quarter compared to the same period last year. Goldman Sachs and Morgan Stanley reported more than a 20% increase in equities trading revenue. Talk about springtime for bankers.
Mr. Trump’s semi-tariff reprieve with Japan seems to have prompted investors to double down on the TACO trade—Trump Always Chickens Out—and sent the S&P 500 and Nasdaq to new highs. The price-earnings ratio for the S&P 500 is close to record levels, which suggests that valuations may be stretched.
Look no further than so-called meme stocks, which are experiencing a mania a la early 2021. As then, retail traders are making leveraged bets on stocks that have large short-interest plays such as Kohl’s, GoPro, Opendoor and Krispy Kreme. Hedge funds are riding the stock-market roller coaster to riches, and day traders want in on the fun.
Meantime, Bitcoin is approaching $120,000, which is up some 25% this year and 80% in the past 12 months. Junk bond spreads relative to Treasurys have shrunk and are close to what they were during the dot-com bubble. Smaller spreads often result from looser financial conditions as demand increases for riskier assets.
None of this signals that there’s a shortage of liquidity, or that current interest rates are restricting credit conditions. Yet back on Main Street, businesses are struggling to borrow. Bank construction loans and housing starts have declined. Job growth has stalled in recent months in most industries outside of healthcare and government.
Tariffs are squeezing margins at many small and medium-sized businesses, which can’t absorb their costs or reconfigure supply chains as easily as the big guys. The Labor Department’s latest JOLTS survey showed hiring declined this spring for employers with fewer than 50 workers while modestly increasing for those with more than 1,000. The mass deportation crackdown has also reduced the available workforce for smaller employers.
Mr. Trump wants the Federal Reserve to cut rates next week, but it’s no easy call when financial conditions are this loose and inflation is still above the Fed’s target. If the new tax bill is as pro-growth as the White House says, that should help the Main Street economy as much as Wall Street. But that also isn’t an argument for cutting rates.
If Mr. Trump wants more prosperity for the little guy, he’d worry less about cutting rates for Wall Street and more about easing his tariff and deportation campaigns for Main Street.
