Still enjoying the ride. With some turbulence, the US stock market survived the second quarter largely unscathed despite Trump's threats to blow up the global trade order.

US President Donald Trump’s trade policy, along with a surprising synchronized global economy recovery, was a defining theme for much of 2017, propelling bulls to push the US stock market to new record highs on what felt like a daily basis. Threats of protectionism were all talk, the conventional wisdom went, but with deregulation and tax cuts the US president meant business.

And then the tariffs came. The first round of Trump’s dramatic show of protectionism came in March with a televised announcement from the Oval Office that steep tariffs would be slapped on steel and aluminum from just about everywhere. US stocks rose on the news, presumably in relief that the administration granted exceptions and there would be room for negotiating.

The Dow Jones Industrial Average fell in the weeks following the metals announcement, but has largely remained flat since then. In fact, after falling in the first quarter, US stocks have risen in the second quarter, with gains fairly broad-based across sectors.

In day-to-day trading, US stocks have been resilient to increasingly belligerent trade policy from the White House, which has since slapped metals tariffs on the allies who were previously granted exemptions and is set to impose import taxes on more than US$30 billion in Chinese imports less than two days from now.

Stocks fell in light trading on Tuesday ahead of a day off for the Fourth of July holiday, but that followed three straight days of gains, despite no sign that the US and China have made any progress in negotiating a resolution to the trade fight. The tariffs are coming.

Investors, it seems, are still waiting for even bigger bombs to drop before they believe that Trump will be willing to risk slowing strong economic growth with an all-out trade war.

Meanwhile, Trump appears to be basking in the encouragement coming from many pundits who speak to his political base, unfazed by the growing chorus from the Republican establishment and its corporate donor base. There is apparently nothing that industry groups and lawmakers from the president’s own party can say to talk the White House down from the trade-war ledge. Trump took pleasure in antagonizing Harley-Davidson for announcing it will move some manufacturing overseas. Instead of playing down the move, he leaned into it.

Some in Congress are trying to limit the president’s trade authority. But amendments that would require the White House to get congressional approval before imposing tariffs on national-security grounds have been shot down. Most Republicans are afraid to challenge Trump openly and risk eroding support from his enthusiastic base ahead of midterm elections. Some Democrats are happy to side with the president on protectionist measures that used to be their area of expertise.

Amid the outcry from the business community and much of the media and the political establishment, Trump’s approval rating is still hovering near its highest point since the weeks after his election.

So what could make Trump change his mind?

One defining characteristic of this president is his improvisational nature, as noted by those who have worked closely with him over the years. He never wants to be pinned down and wakes up each morning with an open mind.

That is why the market’s indifference to his trade threats is so dangerous. Each day that US stock markets haven’t tanked is another day that he can stand firm on his trade threats. If China’s stock market takes a beating while US stocks tread water, even better. The president, after all, loves to cite stock valuations as a metric for economic performance.

By many measures, the US economy is on shaky ground. As we noted last week, it is potentially a much greater threat to global markets than is China’s. But the White House does not understand this, as summed up by the president’s top economic adviser last week.

“The USA is growing rapidly. The tax cuts, the deregulation rollback, the trade reform … we are growing. The Atlanta Federal Reserve is suggesting we may get near 5% growth in the second quarter,” said Larry Kudlow, the director of the National Economic Council.

“That gives us the strength. China’s economy is not doing well. They are slowing down by many, many measures. Half of that economy is state-run enterprises that are losing money daily.”

That betrays a tremendous lack of understanding of the Chinese economy, but it is a simplistic picture that Trump is presented with.

Investor skepticism in Trump’s willingness to escalate a battle with America’s most important trading partners is creating a dangerous dynamic that could encourage Trump to double down on his disruptive trade policy. When the markets, and economy, finally do feel the pain, it may be too late.

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