Ben White is chief economic correspondent at Politico and author of the Morning Money column.

On election night in 2016, Treasury Secretary Jack Lew had an uneasy feeling. Lew was a Democrat and a native New Yorker, but decided not to join Hillary Clinton and other Democrats at a victory party in Manhattan.

His concern was that if Donald Trump were elected president of the United States—a remote prospect, but not impossible—the shock could be a black swan moment. That’s Wall Street jargon for a highly unexpected event that plunges the economy into the unknown. The sudden arrival of a figure so unpredictable, with so little governing experience, could upend global markets and possibly require emergency government intervention. Lew decided to stay at his post in Washington.


“I had a bad feeling before the election,” Lew recalled in a recent interview. “I voted absentee, because I thought I just had to kind of be there if something unsettling happened, if there was a market reaction.”

Initially, it looked like he had guessed right. As vote tallies began to roll in, and the prediction needles started to tilt hard toward a Trump win, Dow futures plunged nearly 900 points. Asian markets sank. Gold, the ultimate safe haven in turbulent times, rallied hard. All the overnight signals pointed toward a financial shock every bit as big as the political shock.

It never came. The Dow wound up closing 257 points higher the day after the election. Pundits who had been predicting a Trump sell-off began to look silly. And so began one of the more remarkable stories of Trump’s early tenure.

Over his first year, Trump in the White House has proved every bit the disruptive force he promised to be. Much of the disruption was aimed at the business world. Even before the inauguration, he began jawboning individual companies—something presidents generally avoid, and that frightens CEOs. He started making noises about punishing our top trading partners; he pulled out of the Trans-Pacific Partnership trade deal and threatened to pull out of the North American Free Trade Agreement. His administration has been buffeted by a series of destabilizing scandals—and, maybe most alarmingly, his aggressive posture toward North Korean nuclear testing raised the prospect of war.

As each new disruption set off waves in the political realm, something totally unexpected happened in the markets: They ignored it. Stocks, already on an eight-year upward march, just kept rising, calmly breaking one record after another. The volatility index was down, as the market bet that prices would not just keep going up, but do so calmly.

None of the crazy stuff Trump said or did—from boasting about the size of his nuclear button to firing the FBI director running the investigation into his campaign—merited more than a shrug from investors. And when the market finally did hit a turbulent patch, in early February of this year, it wasn’t because of anything Trump had done; it was triggered by a boring old economic indicator, an upbeat jobs report that made investors worry the Federal Reserve might raise interest rates. Even Trump’s globe-shaking announcement last week of big tariffs on imported steel and aluminum only had a temporary effect. Stocks initially plunged on fears of a disastrous trade war, but they recovered nearly all the ground they had lost in just three days, as traders figured Trump would water down the actual policy.

To Democrats, the market’s unperturbed optimism has become a source of consternation. Why can’t Wall Street see that Trump is a news cycle away from bringing down the republic? To Trump, it’s a gratifying endorsement of his leadership, a way to point at the scoreboard and taunt opponents.

Illustration by Asaf Hanuka

The American presidency is the world’s most powerful office, and its stability is the bedrock of markets. Was Trump really no big deal? I dialed up a dozen Wall Street players—traders, hedge fund managers, some of the world’s top economic observers—to figure out whether all those anxious observers were getting it wrong, or they were.

To Wall Street pros, the story of Trump’s bull market is part luck, part policy and possibly a whole lot of irrational exuberance. When investors look past the daily theater, they mostly love Trump’s embrace of traditional Republican policies. He’s slashed regulations and cut corporate tax rates nearly in half, juicing profits and pumping cash into the economy. And they’ve guessed—correctly so far—that Trump the trade warrior and nuclear saber-rattler would remain mostly a cartoon character with little or no real-world impact.

Another reason for the stock market rise is that the United States is only part of a larger global story, one that even Trump has limited power to disrupt. “There really are a lot of forces at play in this rally beyond the president, including a synchronized global pickup in economic growth,” Mohamed El-Erian, chief economic adviser at Allianz, told me.

In the early days of 2017, firms even considered setting up ‘Trump desks’ to trade on the president’s mistakes.

But there’s another possibility: that Wall Street has it all wrong. If Trump really were the black swan he seemed on election night, it’s possible that the kinds of risk he presents—a constitutional crisis, a neomercantilist trade battle, even a nuclear war—just aren’t the kind of things that the markets can price in. And what I found is that some investors are wondering whether the market really is missing something, and that destabilizing moment might still be in our future.



***

Jack Lew wasn’t the only big-picture financial thinker who expected a Trump shock. In late 2016, Palm Beach-based hedge fund manager Doug Kass dubbed Trump “the Orange Swan,” and warned anyone who would listen that the blustering political neophyte was certain to usher in an era of intense volatility, dragging down a bull market run that began in 2009 at the end of the Great Recession.

Following Trump’s win, Kass, a four-decade Wall Street veteran and a prominent market commentator, bet against the U.S. stock market, beefing up his short positions on the assumption that equity markets would fall. His theory, shared by plenty of other Wall Street pros, held that Trump’s lack of governing experience, penchant for unpredictable behavior and pledges to rip up global trade deals and slap tariffs on trading partners would usher in a period of sharp volatility and potentially sink stocks. Trade wars would drive up consumer prices and damage exporters, while Washington ham-handedly lurched from crisis to crisis. In the early days of 2017, Wall Street firms even toyed with the idea of setting up “Trump desks” to buy and sell based on these potential White House mistakes, and to profit from the expected volatility driven by the president’s statements and impulsive tweets.

But they mostly abandoned the idea when it became clear that while Trump news might dominate Twitter, cable TV and Washington cocktail party chatter, it really didn’t matter much to the investors and trading algorithms that dominate Wall Street.

When he tweeted on August 11 that military solutions were “locked and loaded” for North Korea, stocks actually went up.

On January 25, 2017, for instance, Trump tweeted that he would launch “a major investigation into VOTER FRAUD.” Democracy scholars sounded the alarm—voter fraud barely exists, and this could presage an attack on the electoral system—and the media prepared for a potentially brutal political battle. Investors blew it off, and stocks rose for the day. Less than two weeks later, Trump ripped a federal judge on Twitter for putting his travel ban on hold and darkly warned of potential terrorist attacks: “If something happens blame him and court system. People pouring in. Bad!” Political observers saw a constitutional crisis in the making. But markets barely budged the next day. When Trump fired FBI Director James Comey on May 9, Wall Street didn’t care. When he tweeted on August 11 that military solutions were “locked and loaded” for North Korea, stocks actually went up.

The market hasn’t blown off everything Trump-related. Last August, the Dow dropped nearly 300 points in a single day after Trump’s controversial comments about a white supremacist rally in Charlottesville, Virginia. The fear then was mostly that the comments would drive out Trump’s top economic adviser, former Goldman Sachs President Gary Cohn, widely viewed as a moderating, pro-free trade voice within the White House. (After yesterday's announcement of Cohn's actual departure, the Dow slumped a bit but didn't plunge, in part because the tariffs made it clear he'd already lost influence.)

Is It Really Trump’s Market? Try as he might to tie the market’s success to his own accomplishments, the rally that Donald Trump boasts about so much is mostly the result of broader global forces. As seen here, the American stock market index (SPX) rose roughly in tandem with the world index minus U.S. equities (ACWX:US)—and it started before Trump took office. 1: Nov. 9, 2016, Day after election. 2: Jan. 20, 2017, Inauguration Day. 3: Aug. 15, 2017, Trump’s Charlottesville comments. 4: Dec. 1, 2017, Brian Ross story about Trump and Flynn.

Another Trump moment that moved markets came when ABC’s Brian Ross erroneously reported in December that Trump had directed Michael Flynn to make contact with the Russians before the election. The report—later corrected to say the direction came after the election, when Flynn was President-elect Trump’s national security adviser—sent the Dow down 350 points on concerns that Trump’s impeachment could be a real possibility. “If you are trying to weight the different things that could send this market down, you’d have to put an ugly impeachment fight near the top of the list,” the head of trading at one of Wall Street’s largest banks told me. (That drop also punctured one theory for why markets don’t react much to negative Trump news: that Wall Street would be just fine with a President Mike Pence.)

Trump’s tweets have occasionally hurt individual sectors, such as on March 7, 2017, when Trump tweeted about a “new system where there will be competition in the Drug Industry.” Pharmaceutical stocks took a tumble on the news, but most quickly recovered. And markets overall kept ticking upward, hitting a seemingly unstoppable series of new highs. The upward march became so predictable that the VIX, the market’s volatility index, started hitting record lows. Betting against volatility became a thing, and traders who did so took a beating in early February of this year when volatility came back in a big way.



***

“The man in the White House is a bit of a moron,” the hedge fund manager told me on the phone, “but he’s a pro-business moron.”

I had called one of the wealthiest hedge fund managers in the world, a multibillionaire who has been on Wall Street for a half-century. He voted for Trump and supports the president’s policies, even if he despises the president’s personal behavior.

“Trump’s been refreshing to capitalists like me who felt like Obama had his foot on the throat of the economy, and now the foot is off,” the hedge fund manager said between barking orders to subordinates. “He’s pro-business in the sense that Reagan was, but without the charm.”

If there is a unified field theory for why Trump’s highly unusual presidency doesn’t ruffle Wall Street, it’s this: Beyond all the noise and bluster, he’s mostly a standard-issue Republican. At the agency level, his appointees have championed fewer regulations on every conceivable industry, rolling back or postponing one Barack Obama-era restriction after another. Trump also signed a bill slashing the corporate tax rate nearly in half, fattening corporate profits, and unleashing dividend payments and stock buybacks, all of which help drive share prices higher.

The radical parts of Trump’s presidency—his nativist populism, his penchant for chaos and fights—have confined themselves mostly to cultural politics, such as his sparring over the NFL and repeated demands for a “big, beautiful wall” with Mexico. The trade wars with Mexico and China have not materialized. At least so far, he has mostly tinkered with trade deals like NAFTA, and applied relatively small-time tariffs on things like solar panels and washing machines.



“The man in the White House is a bit of a moron, but he’s a pro-business moron,” one hedge-fund manager told me.

Those conclusions are shared by other money managers and traders I spoke with, many of whom are Trump supporters. “Trump raises the level of risks, but as long as he listens to his better advisers, the risks are not really that high,” said the hedge fund manager.

It’s not surprising that Wall Street’s top dogs would think so. In a culture in which big decisions are made based on exhaustively sifted data, computer models, and layers of managing directors and partners, there would be high confidence that Trump would listen to his advisers. But this is an area where the Masters of the Universe may have it wrong. Trump came up in a different business culture, a small family shop taking big impulsive bets. His whole life has been based on doing whatever he wants, whenever he wants.

Trump supporters on Wall Street have also come to believe that the rally itself serves as an important check on Trump’s instincts. Trump hasn’t hesitated to tie his reputation to the market’s success. “Business is looking better than ever with business enthusiasm at record levels. Stock Market at an all-time high. That doesn’t just happen!” Trump boasted in August. He has followed up that sentiment dozens of times on Twitter and boasted of the stock market rally in his State of the Union address: “The stock market has smashed one record after another, gaining $8 trillion in value.”

Within the White House, this has become a way to keep Trump in check. In debates over whether to pull out of NAFTA or slap heavy tariffs on the Chinese, advisers including Cohn and Treasury Secretary Steven Mnuchin have often argued to the president that acting rashly could cause major market declines, robbing Trump of one of his favorite boasting points.

Illustration by Asaf Hanuka

“Inside the administration, Mnuchin and Gary have made that case, and others have made that case,” said Larry Kudlow, an informal Trump adviser rumored as a possible successor to Cohn. “He’s given free traders an unexpected source of leverage, and they’ve used it.”

Wall Street also knows that this isn’t really Trump’s market. The rise long predates his arrival and is subject to global forces well beyond his control. Kass, the Palm Beach hedge fund manager, attributes almost all of the market gains to forces well beyond Trump, pointing to similar stock market rallies in Britain, Germany, France and elsewhere in 2017.



Trump has presided over a period in which there is increasing demand for a smaller pool of publicly traded stocks, following years of mergers and delistings.

And the U.S. stock market itself has changed. Trump has presided over a period in which there is increasing demand for a smaller pool of publicly traded stocks, following years of mergers and delistings. Computers do most of the trading now, eliminating a lot of the emotional reaction to news that used to buffet stocks. “Markets are much less sensitive to news headlines than they were just a decade ago,” Kass said.

“This phenomenon of news happening that you think should impact markets not impacting markets has been going on for several years now. It’s not really specific to Trump,” a senior trader at one of Wall Street’s biggest banks told me. “Now you see stuff that normally would have caused real ripples in markets, and the market just blows it off. It’s been happening since the bottom of the crisis in 2009.”



***

The most disturbing scenario painted by all the Wall Street pros I talked to is that Trump really does pose a massive systemic risk, and markets just can’t see it or can’t price it. Traders on Wall Street have come of age during decades of mostly traditional presidents, from Gerald Ford through Barack Obama; their models and assumptions are all built on an extremely consistent version of American governance. They’ve seen nothing and no one like Trump.

Reckoning with a Trump disruption isn’t a problem like factoring in inflation, or assessing a price-to-earnings ratio. How do you gauge the impact of a unique event like a constitutional crisis? How do you discount the possibility that an aging, narcissistic, insecure president could fire a nuke at North Korea in a fit of personal pique, or rip up NAFTA because he had a bad morning?

Part of the reason markets don’t react much to the North Korea talk, the senior trader said, is that there is really no way to model what an actual conflict would look like, so people just assume it won’t happen. “How can you even analyze a nuclear war?” the senior trader said. “There was a chance a few weeks ago that we were going to enter a nuclear war, and markets didn’t react to that. … And yes, that is pretty crazy.”

Wall Street now has to grapple with what’s called “political risk,” a practice more familiar to analysts considering investments in unstable regimes like Nigeria or Myanmar. The level of uncertainty in American political life under Trump is a new thing in modern financial history. And the giant run-up in stocks after Trump’s win quickly, and possibly prematurely, extinguished early efforts to prepare for things to go very badly.



The most disturbing scenario: The kind of risk Trump poses may be too large for the market to price.

Kass, for his part, is not willing to junk the Orange Swan theory just yet. Pointing to the couple of sharp drops in late January and early February, Kass told me he was once again adding to short positions in U.S. stocks, much as he did before big declines in 2000, as the dot-com bubble burst, and in 2007, when the mortgage market collapsed.

“The virtuous cycle for stocks may be coming to an end,” Kass said. “And when it does happen, it’s going to happen with such rapidity that everyone who hyped up this rally is going to have their head spinning.”

Just as Trump may have had only a limited role in a rising stock market, there may be little he can do to stop any decline. In fact, it could be at least in part a shock of Trump’s own making. The flood of cash flowing into the economy from the tax cut package—in the form of higher wages, bonus payments and dividend checks for investors—is sparking inflation fears. Lower tax receipts have also sped up the timetable in which Washington runs into the federal borrowing limit known as the debt ceiling.

Now that volatility is back on Wall Street, following the whipsaw thousand-point-a-day moves in early February, there is a real chance that the gloss of optimism around Trump’s presidency will end, and suddenly investors will start to worry in earnest about what he says.

“What happens is that when things go bad, you tend to focus a little more on realities that had been ignored,” said Steve Massocca, chief executive of Pacific Growth Equity Management in San Francisco. “And no matter what political pew you sit in, almost everyone recognizes the risks of this White House making serious policy mistakes.”

But for now, according to Massocca, investors remain largely in love with the Orange Swan. “Wall Street loves Donald Trump,” he said. “It might hate some of the stuff that he says, but it loves Donald Trump.”