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Why Trump would be OK with a 10% nosedive in the stock market

Brian Sozzi
Editor-at-Large

President Donald Trump — aka the stock watcher in chief — may be OK with letting stocks swoon at least 10% from current levels.

Sorry bulls buying on the recent dips, just keeping it real.

“What I have been telling clients is that this isn’t just another Trump tweet, he could really push it here. The political risk reward for him to achieve his policy objective is really compelling,” Weeden & Co. Chief Global Strategist Michael Purves said on Yahoo Finance’s The First Trade .

“Can Trump afford a 10% dip in the market right now? Sure he can,” he said.

Purves’ logic — which is rather logical in and of itself — is centered in two areas.

First, an overarching amount of data at the moment is Trump’s friend. For example, even if the market nosedives 10% it will still be up on the year. Widely-held tech stocks such as Amazon ( AMZN ) and Netflix ( NFLX ) will probably continue to be up double-digits on the year in a broader market pullback. Monthly job gains remain impressive for this late in the economic cycle.

And despite the growing number of warnings on the impact of tariffs from the likes of household name companies Deere and Macy’s, Corporate America easily avoided the much hyped earnings recession in the first quarter. Many companies have started the second quarter — while perhaps feeling a bit more uncertain given the trade impasse with China —with solid momentum. So have U.S. consumers, according to consumer sentiment hovering near a 15-year high.

Amidst all of these otherwise negative headlines, Trump’s approval ratings have stayed remarkably resilient. Go figure.

In effect, Trump has bullets to spare in his trade battle with China.

“Given his State of the Union showcased his desire to see structural reform in China — U.S. economic conditions (not something that comes quickly or easily), we think it is reasonable to assume that Trump may well push this as hard as he ever has right now given his domestic political position and China’s still vulnerable position,” Purves explained.

Fed’s Powell ‘is now an asset’ to Trump

Meanwhile, the Jerome Powell led Federal Reserve is also a friend to Trump currently. He may not look at it that way, but it’s quite true.

Powell has promised to be patient on interest rate hikes for as far as the eye could see. That wink to the markets — known on Wall Street as the “Powell Put” — will likely protect stocks from going down too far if Trump pushes China harder on the trade front.

“If Powell was a liability for Trump in October, he is now an asset which Trump can and will leverage,” said Purves,

Again, more bullets for Trump to spare.

So given this backdrop, why shouldn’t Trump go all in on trying to get the best trade deal with China? Doing so may come at the expense of short-term gains in stocks, but could shore up long-running trade problems with China.

That would be bullish for Corporate America... and Trump into the 2020 race for the White House.

Brian Sozzi is an editor-at-large and co-host of ‘ The First Trade ’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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