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Stock markets have long served as an effective weighting mechanism that measures the current and near-future health of the economy and businesses. Even US President Donald Trump has referenced market performance as a measure of his policies’ effect on economic success. It makes sense: trillions of trades occur daily across the globe, with investors analyzing real-time data to make buy, sell, or hold decisions. Collectively, these decisions act as a form of grading for the economy, offering a live assessment of market sentiment.

Lately, however, it’s been increasingly ironic to watch government officials who advocate for smaller government and increased efficiency simultaneously push for far-reaching economic interventions. These actions go against the principles found in most economics’ textbooks, which generally argue that the best kind of government is one that limits its involvement in the economy. The government’s role is typically to provide essential services that are difficult or unprofitable for the private sector – such as national security, education, and infrastructure—not to micromanage economic outcomes.

In practice, though, we are seeing a disconnect. While today’s administration often talks about empowering the economy, its actions suggest a different agenda. The market has taken notice and is reacting accordingly. The US President Donald Trump even acknowledged the situation by stating, “Sometimes you have to take medicine to fix something,” signaling that he’s accepted a poor market response as a necessary side effect of current policy choices. In other words, he’s no longer trying to “pass the class” or be proud of the market’s grade, which is a troubling signal for investors.

When fiscal policies aim to reshape the global economic structure rather than build on the strengths of free-market systems, it results in uncertainty. And markets, by their nature, dislike unpredictability. That uncertainty is reflected now, especially in the stock market performance this year. Considering different sectors and indexes as school subjects, it becomes clear which ones are failing. The Russell 2000, an index representing smaller U.S. companies that earn around 80% of their revenue domestically, is currently the worst performer, down 21% year-to-date (see Chart 1). This is particularly notable because these companies are the most exposed to domestic policy and should, in theory, benefit the most from a “pro-business” administration. Instead, the market appears more concerned about U.S. businesses than ever.

The next-worst performer is the technology-heavy NASDAQ-100, down 18% year-to-date. Historically, technology has been a stronghold for the U.S. and a key competitive advantage. However, with growing government involvement, investor confidence seems to be slipping even in this high-growth sector. The broader U.S. stock market has not fared much better, down 16% for the year so far.

In contrast, international markets are holding up relatively well. China, as tracked by the MSCI China ETF, is down just 2%. European markets are flat, and Latin America is slightly up for the year, making it the best-performing region globally. These results underscore a key point: markets tend to perform better under systems they understand and can value, which is usually one with minimal government interference. When governments begin to change the rules or introduce broad, structural changes, markets struggle to forecast outcomes.

Fiscal policies often have long-term effects, and the full impact of today’s decisions may not be felt for years. That’s both the promise and the risk. While some changes may eventually yield positive results, the short-term effect is one of uncertainty, which is already weighing heavily on market performance.

Ultimately, markets are more than just price movements—they reflect investor confidence and faith in the broader system. Right now, that confidence is being tested, and there is no clear vision of what the new economic system will be and how it should be re-evaluated. The stock market is issuing grades in real-time, and so far, the results suggest a lack of faith in the current direction. Investors will need more clarity to give an accurate grade, and the grading is not over yet.

Disclosures:

The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision. Neither ECNFIN.COM nor its author is responsible for any damages or losses arising from any use of this information. Past performance doesn’t guarantee future results.

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