US stocks turned from rising to falling this year. Will it trigger the "Trump put option"?

Some analysts believe that the S&P 500 would have to fall at least 10% to trigger the "Trump put option," which means that the government would intervene to support the stock market.

The U.S. stock market fell sharply again on Thursday (February 27) as concerns about Trump's tariffs dampened optimism brought by Nvidia's strong earnings report. The S&P 500 fell 1.6%, and has now wiped out all its gains this year, with a slight decline for the year; the Nasdaq Composite fell 2.8%, and has fallen 4% for the year; the Dow Jones Industrial Average closed down 0.5% on Thursday.

If the sell-off intensifies, whether the Trump administration will intervene to support the stock market is a hot topic on Wall Street.

Bank of America strategist Michael Hartnett mentioned the "Trump put" in an interview with Bloomberg TV earlier this week, saying: "If the stock market falls uncontrollably, the Trump administration may take action to respond."

Hartnett said: "I think if the Trump administration does not make any attempt to support the stock market, whether through fiscal policy or limiting the authority of the 'Department of Government Efficiency' (DOGE), investors will be worried about the S&P 500 falling to around 5,700 or 5,600."

What is the "Trump put"?

Previously, investors often talked about the "Fed put," in which the Fed would intervene before things started to deteriorate, thereby eliminating fluctuations that could destabilize the stock market.

This is equivalent to the Fed selling a put option, which obligates the seller of the put option to buy the stock if the stock price falls below a certain level (i.e., the strike price). Investors have coined the term "Trump Put" based on this concept.

It should be clear that neither the "Fed Put" nor the "Trump Put" means that the Federal Reserve or the federal government will intervene to buy stocks themselves, but is a metaphor for any rhetoric or direct action that may incentivize investors to buy.

Where did the idea of ​​the "Trump Put" come from?

Trump sees the performance of the U.S. stock market as a barometer of his performance as president. During his first term, Trump often posted on social media to celebrate stock market record highs, and he often publicly praised the stock market's gains during his administration.

“Trump is clearly watching the stock market and using it as a real-time indicator of whether the market supports his policies,” said Jason Draho, head of asset allocation for the Americas at UBS Global Wealth Management.

However, Trump has also experienced periods of extreme stock market volatility, and his administration’s response during those periods could provide some clues about how it might handle similar situations today.

In late 2018, the S&P 500 fell nearly 20% from its peak, erasing gains from earlier in the year as Trump’s trade war with China and the Federal Reserve’s rate hikes unnerved investors.

Binky Chadha, chief strategist at Deutsche Bank, noted that after the S&P 500 fell about 10% from its high, the Trump administration’s strategy changed, and Trump did not further escalate the situation, but quickly reached a deal with China to end the trade war. But at the time, that did not immediately comfort investors.

On Christmas Eve 2018, U.S. Treasury Secretary Mnuchin said he had called the CEOs of the largest banks in the United States. Mnuchin said the CEOs assured him that the banking industry had ample liquidity, but investors still accelerated their selling.

In a report published in 2019, Chadha concluded that "even if the put option is triggered, it is not very effective."

More than a year later, in March 2020, the stock market crash caused by the new crown epidemic wiped out all the gains accumulated by the S&P 500 since the beginning of Trump's term, but the subsequent spending plan launched by the U.S. government and the bold actions of the Federal Reserve quickly curbed the sell-off, and the stock market soon rebounded.

How much does the stock market fall to trigger the "Trump put option"?

Chadha thinks it may be a little early to answer that question because the Trump administration is so young, but he expects the S&P 500 will need to fall at least 10% from its current level to prompt Trump and his team to act.

Others wonder if Trump's enthusiasm for the stock market is waning. Michael Brown, senior research strategist at Pepperstone, noted that the Trump administration's aggressive approach to deporting immigrants and cutting spending suggests he may be more willing to tolerate more stock market declines this time around. That's a risk investors should keep in mind.

For example, Trump posted on Truth Social earlier in February that his tariff policy could cause "some pain" for Americans.

Brown said: "There is a big risk that the 'Trump put' may not be triggered, that is, Trump may be prepared to sacrifice economic growth to achieve his spending cuts and/or the administration may move forward with tariffs to change the trade imbalance rather than just using tariffs as a negotiating tactic, even if these measures will create significant macro and market headwinds."

Is the 'Trump put' more applicable to bonds?

Some analysts have recently suggested that Trump's focus on the stock market may have given way to a heavy focus on the bond market.

This view is inspired by comments from senior Trump administration officials, including Treasury Secretary Bessant and special government employee Elon Musk.

Musk said at X earlier this week that the commitment to control the US budget deficit could help boost demand for bonds, sparking the view that the real 'Trump put' may apply to bonds rather than stocks.

Musk said at the time: "If you're shorting bonds, then I think you're betting on the wrong thing."

Earlier in February, Bessant said the government was "focused" on lowering the 10-year Treasury yield.

Draho said it was too early to tell whether the recent decline in Treasury yields was intentional, and that many factors could have contributed to the result, including growing uncertainty about the trajectory of the U.S. economy and labor market.

Draho said: "It's too early to say that the bond market's moves over the past few weeks are a reflection of the 'Trump put,'"

Draho also expressed doubts about the view that "Trump delayed tariffs on Mexico, Canada and China because of weak stock market performance."

A more likely scenario is that Trump made the decision to delay the tariffs because he successfully got the Canadian and Mexican governments to make concessions on border issues.

If Trump really wants to boost the market, the easiest way is through his rhetoric on trade, Draho said. Trump can also choose to increase federal spending, which Draho also pointed out would require the cooperation of Congress.

Citi equity strategist Scott Chronert said he and his team did not predict the strike price of the "Trump put option," but if the S&P 500 falls to 5,500 points, the index will fall back to his estimated "fair value" range, which may attract investors to return to the market.

Over the past two years, investors have been looking for opportunities to buy when the stock market shows signs of weakness, and a 10% drop may attract buyers to buy heavily even if the "Trump put option" is not triggered.