In the opening weeks of the year, Washington has delivered a string of political shocks that, in another era, might have rattled global financial markets. A foreign leader was captured abroad. The US Justice Department opened an unusual probe touching the independence of the central bank. And a disruptive White House moved forcefully into new corners of American commerce, from energy assets to consumer finance.
Yet instead of retreating, investors have surged deeper into risk. Equity markets have climbed sharply, volatility has faded, and capital has flooded into some of the most aggressive corners of the financial system. The response underscores how markets have grown accustomed — and in some cases openly receptive — to the confrontational governing style of President Donald Trump, now well into his second term.
January inflows into equity-focused exchange-traded funds are running at roughly five times the historical average for the month. Over the past three months, such funds have attracted a record $400 billion, according to industry data. Leveraged-long ETFs — products designed to amplify gains — now hold about $145 billion in assets, dwarfing the roughly $12 billion parked in funds that profit from market declines. Cash allocations among institutional investors have dropped to record lows, Bank of America Corp. said in a recent survey.
Elsewhere, warning lights that once would have drawn scrutiny are being largely ignored. Credit markets are tightening rapidly, with risk premiums on high-yield bonds shrinking even as corporate borrowing accelerates. Some strategists say conditions increasingly resemble 2007, the year before the global financial crisis, when confidence proved dangerously misplaced.
For now, that confidence is giving the administration unusual freedom of action. With stocks climbing and volatility subdued, markets are offering little resistance to a White House that appears willing to test institutional and economic boundaries.
“The president is very much using the markets as a scorecard right now, and that scorecard — from the president’s point of view — says he’s winning,” said Mark Malek, chief investment officer at Siebert Financial. “That kind of feedback can encourage policymakers to push further, to go deeper into parts of the playbook they haven’t fully used yet. In other words, expect the unexpected.”
The relationship, however, cuts both ways. Last April, markets did revolt — briefly. A threatened wave of sweeping tariffs sent global equities tumbling, with the S&P 500 plunging sharply over several sessions. The selloff prompted the administration to soften its protectionist stance, marking one of the few moments in Trump’s second term when investor backlash appeared to temper policy in real time.
Today, by contrast, fresh shocks are largely being treated as background noise. Many investors believe that if markets were to suffer a serious downturn, the White House would again pull back, just as it did in April. Until that happens, money continues to chase themes tied to artificial intelligence, industrial recovery and a rebound in cyclical demand.
That optimism is visible in market positioning. The equal-weighted S&P 500 — which gives smaller companies more influence — has outperformed the traditional, mega-cap-dominated index so far this year. One major ETF tracking the less-concentrated benchmark has pulled in $3.7 billion in fresh inflows. Small-cap stocks are also enjoying renewed interest: the Russell 2000 rose about 2% over the past week, extending its outperformance against the broader market.
“We’re seeing growth without renewed inflation pressure,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “The economy looks to be on solid footing while inflation continues to behave. There’s also a bit of fear of missing out, especially at the start of the year.”
Recent economic data have reinforced that view. Weekly jobless claims suggest the labor market remains resilient, while US factory production unexpectedly rose in December. At the same time, measures of price pressure continue to ease, strengthening the case for sustained growth without aggressive monetary tightening by the Federal Reserve — even as its independence becomes a political talking point.
Options markets tell a similar story. Despite escalating rhetoric toward Iran, the seizure of Venezuelan oil assets and proposals to cap credit-card interest rates, the VIX — Wall Street’s so-called fear gauge — sits in the lower end of its five-year range. The cost of insuring against sharp market declines remains below average, and demand for tail-risk hedges is muted.
“Investors have been so well rewarded for ignoring geopolitical and policy risks that it will take something very tangible to shake that confidence,” said Peter Atwater, founder of Financial Insyghts.
Not every policy move is seen as negative. Redirected Venezuelan oil could ease global supply constraints, while a cap on credit-card rates may temporarily support lower-income consumers. But taken together, the broader effect is striking: with risk assets rising and volatility compressing, Washington appears to be operating under unusually weak market constraints.
The danger, some warn, is not any single decision, but the cumulative effect of unchecked confidence. When positioning becomes one-sided, even modest shifts in sentiment can trigger abrupt and destabilizing moves.
“There’s a cohort of institutional investors who remain more cautious than headline indexes suggest,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “They’d likely hedge aggressively on clear downside confirmation — and paradoxically, many would also be ready to buy if a sharp selloff created what they see as another opportunity.”
For now, markets continue to signal approval. Whether that confidence proves durable — or merely delayed — may ultimately determine how far Washington is willing to go.
