Investors have bid stock prices up to historic highs this week, brushing off escalating threats from President-elect Donald Trump to disrupt global trade.
Most analysts agree that a rupture between China and the United States, the world's two most important economies, could have serious consequences, including a recession. Few on Wall Street, however, believe Trump will deliver on his promises to radically alter U.S. trade relations. Instead, investors see those policies as "a risk case, not the baseline," said Joseph LaVorgna, the chief U.S. economist at Deutsche Bank.
"Right now, markets have decided to focus on the positive and not dwell on the negative," said Mark Zandi, the chief economist at Moody's Analytics, who has been critical of Trump's economic policies.
Trade — especially with China and Mexico — has been Trump's focus both as a candidate and now as president-elect. He has promised to impose punitive tariffs of 35 percent on companies that shift manufacturing overseas. Last Friday, he took a call from the leader of Taiwan, an action that people familiar with the matter say was a planned provocation directed at China (though Trump played it down as an impromptu congratulatory call).
On Tuesday, he publicly criticized Boeing's contract for the president's personal plane after the firm's chief executive officer was quoted questioning Trump's views on trade.
Meanwhile, the Dow Jones industrial average and the Standard and Poor's 500-stock index both recorded all-time highs two days in a row.
"I don’t think that markets are putting enough weight on his words and his actions to date," Zandi said. "He clearly is willing to engage in brinkmanship with the Chinese."
Many believe that Trump will be dissuaded from adopting any truly protectionist policies. Senior GOP lawmakers including House Speaker Paul D. Ryan (R-Wis.) have rejected the idea of tariffs. In an interview last week on CNBC, Wilbur Ross, Trump's nominee for secretary of commerce, suggested that tariffs would be a last resort.
"Everybody talks about tariffs as the first things. Tariffs are the last thing. Tariffs are a part of the negotiation," Ross said.
Instead, investors are optimistic that Trump and Congress will substantially reduce taxes while spending more on infrastructure and defense, putting more money into the economy and juicing corporate profits.
“Investors are of the view that there is a very good chance that President-elect Trump can get a lot of what he wants done because he has Congress behind him,” said Deutsche Bank's LaVorgna. "That shift in growth expectations is legitimate.”
LaVorgna forecasts that the annual pace of economic expansion will accelerate to 3 percent next year and 3.3 percent by 2018.
As president, however, Trump will have broad authority to impose certain tariffs and other restrictions without congressional approval. Professional forecasters are "downplaying the likelihood of trade war," argues Joel Prakken, the founder of Macroeconomic Advisers.
"I wonder whether that is a serious oversight," he added. "It's possible that as time goes on, there's going to be some rethinking."
By contrast, enacting major tax relief or allocating new money for defense or infrastructure could take months of bargaining on Capitol Hill.
"To think that some kind of grand compromise is going to be reached pretty quickly, and you’re going to get this fiscal stimulus from tax cuts in 2017 — that seems like a stretch to me," said Prakken, who has not increased his forecast for economic growth since Trump's election.
Data from some markets give indications investors are accounting for the risks Trump poses to their portfolios.
The dollar has gained about 1.5 percent against the Chinese renminbi since Trump's election and more than 11 percent against the Mexican peso, indicating that investors anticipate that tariffs could reduce demand for those countries' exports.
Shares in Apple, which manufactures many of its products in China, declined 6 percent in the days following Trump's victory, although the price has since recovered. On Wednesday, Trump told a crowd of donors he had asked Tim Cook, Apple's chief executive officer, to build the firm's next plant in the United States.
Meanwhile, yields on Treasury bonds have skyrocketed, indicating investors are demanding more in exchange for loaning money to the U.S. government.
To some degree, the increases in yields are a positive indicator, because they show that investors believe they will have other good opportunities for making money in the near future. Yet movements in the yields on notes with longer terms indicate profound uncertainty among bondholders about what policies Trump will pursue and what the consequences will be, said Paul Eitelman, a strategist at Russell Investments.
In stock markets, there is little outward sign of pessimism — at least so far. "It looks increasingly like U.S. equities are moving into a euphoria phase," Eitelman said.
"There is a very real risk that he will deliver on some of these trade and immigration proposals that he campaigned on," he added, referring to Trump. Eitelman projects growth of about 2.25 percent next year and a similar pace in 2018, with the risk of a recession increasing in the years to come.
Washington Post reporter Ylan Q. Mui contributed to this report.