“Stock markets respond to risks shifting around,” said Claudia Sahm, chief economist at New Century Advisors and inventor of the famous Sahm rule for recessions. “Households respond to reality.”
Since the post-2008 financial reforms, Wall Street‘s trading desks have been rebuilt around client facilitation. They don’t make money when markets go up; they make money when clients trade. And clients trade when prices move—it doesn’t matter the direction. The Iran war, the oil shock, the Liberation Day whiplash, the Greenland threats, and the Venezuela operation: Each is a reason for an institutional investor to pick up the phone and reposition. Volatility is the product.
That’s how you get a week in which Bank of America’s stock-trading desk posts its highest quarterly revenue in nearly two decades; Morgan Stanley’s equities desk sets a record; Goldman beats estimates; and the five biggest banks collectively are on track for more than $40 billion in first-quarter trading revenue, roughly 13% above last year.
The consumer has no equivalent machinery. The University of Michigan’s preliminary April consumer sentiment reading came in at 47.6, a 10.7% drop from March and the lowest in the index’s history, worse than the June 2022 trough that Republicans used as a cudgel against Biden for two straight election cycles. The decline cut across age, income, and party.
And Sahm told Fortune the gloom isn’t just about this spring.
“It’s not just about the last hit to their finances,” she said. “It’s a period of time over the last five years—there’s just been one disruption after another, and it builds up.”
Americans are exhausted from the pandemic, the 2022 inflation surge, tariffs. And now, a war that has pushed gas to a national average of $4.16. While the stock market zooms out to a 12-month horizon, the consumer is stuck in the lived reality of the status quo.
“The gas price shock puts greater strain on discretionary spending by lower-income households,” BofA analyst Shruti Mishra wrote, “since they spend a larger share of their income on gas and save less.”
“The consumer is not as resilient as it was back when Russia invaded Ukraine,” Sahm said. “That was a much stronger labor market. Consumer balance sheets were better. That’s just not the case now.”
Which raises another question: If American consumers are running out of road, and the S&P’s forward earnings estimates assume they aren’t, what happens when the two have to meet? “We’re in a place where there’s enough broad-based slowing that I expect this to make a dent in consumer spending,” Sahm said. “That could be a speed bump for the stock market, and that is not my impression of what is baked into the earnings estimates.”
And then there is the question that social media is obsessed with: “market manipulation.” Sahm is careful with the term.
“That’s a very specific thing,” she said; it denotes whether or not someone on the inside can time trades based on the information they exclusively have.
And to be sure, insider trading may have been part of some of the big swings. The Commodity Futures Trading Commission is investigating at least two instances where oil futures volume surged in the minutes before Trump announced major Iran policy pivots, according to Bloomberg.
But broadly, as to the question of jawboning, Sahm says it’s not so unusual.
“There is a conversation he’s having with markets, and he’s listening to markets,” she said of the president. Trump’s maximalist style—threaten annihilation, then walk it back, then threaten again—has trained investors to buy the dip on the retreat, because the retreat always comes.
“Investors who missed out on the post–Liberation Day recovery because they got scared don’t want to miss out this time,” Sahm said. “As soon as it looked like the worst case was off the table, the stock market was just off and running.”
But Sahm offered one note of caution that runs counter to the rally.
“I kind of worry about the day where markets completely ignore him,” she said, “because then we’re in a place where this has really gone off the road.”
