Stocks experience an extraordinary recovery following a significant plunge, triggered by Donald Trump's tariffs declaration.
In the wake of President Donald Trump's "Liberation Day" tariffs announcement, the stock market formation seemed to be haunted by a specter of fear and uncertainty.
Beginning on April 9th, following his April 2nd announcement, the S&P 500 suffered a staggering decline surpassing 12%. Such a drop usually occurs only during extreme events such as the Covid-19 pandemic, the subprime mortgage crisis of 2008, or even unexpected presidential announcements. That period also saw the fifth-worst two-day percentage decline since World War II.
Government bond yields started to slowly inch upward, increasing the cost of borrowing money for the U.S., as signs emerged that both the substance and unpredictable rollout of Trump’s tariff plan were testing traders’ faith in the nation's ability to make timely debt payments.
Worldwide stocks slumped in tandem.
"April was an absolute earthquake in financial markets," analysts with Deutsche Bank remarked in a note to clients. "The initial moves were truly historic in their swiftness."
With the stock and bond markets blaring danger signals, Trump scaled back some of his tariffs on April 9th, leading to a frenzy of relief among investors. He declared a 90-day pause on the reciprocal tariffs for "non-retaliating" countries, causing the S&P to witness its best daily performance in nearly 17 years, with a 9.5% surge. Concurrently, the sell-off in Treasurys stabilized.
32 days after Trump's landmark April 9 Rose Garden speech, stocks staged a remarkable comeback, returning, for the most part, to where they stood when the "Liberation Day" tariffs were initially unveiled. Volatility in borrowing costs, too, has settled down.
The gains are relative: Stocks remain about 6% below their pre-Inauguration Day levels. However, some blue-chip companies like Apple are still battered, with its stock plunging over 20% since its all-time high in winter, although factors beyond the president's policies have contributed to its woes. Tesla, headed by Elon Musk, a Trump confidant, is still 40% off its December peak.
Nevertheless, the broader recovery has been impressive. According to Dow Jones, the market's performance through the eighth trading day last week constituted the biggest gain for the S&P 500 since November 2020, when markets demonstrated their first signs of recovery from the depths of the Covid-19 pandemic.
And with Friday's close, the index experienced its longest winning streak in 20 years.
Experts attribute the recovery to a combination of Trump's softer stance on tariffs and market participants embracing the notion that tariffs are here to stay in some form.
"Markets are adapting to the tariffs story and saying, 'OK, this has happened, now what do we do about it?'" said Roxanna Islam, head of research at VettaFi, an asset management platform. "People are starting to look forward rather than backward."
If the influx of cash into a popular low-cost investment vehicle is any indication, the recovery has been primarily driven by "retail" investors, adventurous investors inclined to make frequent market trades. These individuals stand apart from long-term investors such as 401(k) holders or large institutions, which usually adopt a more measured approach to investing.
According to Vanguard, the investment group that manages exchange-traded funds (ETFs), "bulls," or net buyers of stocks, outnumbered "bears" (net sellers) by a ratio of nearly 4 to 1 among self-directed investors last month. The Vanguard ETF saw a $21 billion inflow last month, which is the greatest in its 15-year history and the fifth-largest amount ever taken in by a single fund on a monthly basis, according to Bloomberg News.
In essence, the market remains highly sensitive to trade deals, especially with China, which was excluded from Trump's initial tariff pause. As recently as Friday, stocks soared due to a Wall Street Journal report suggesting that China was open to addressing Trump's concerns regarding the fentanyl crisis as a potential avenue for both sides to soften their trade dispute.
Overall, economic growth was negative for the first quarter of the year, a condition that likely worsened when businesses hurried to stockpile imports ahead of tariffs. Consumer spending, which accounts for more than two-thirds of the economy, decreased to a 1.8% quarterly gain after surging to a 4% gain in the fourth quarter last year. Excessive unemployment and slowing wage growth were evident in the most recent jobs report.
Companies, too, are lowering their financial guidance for the year or withdrawing it, while awaiting clarity on the impact of Trump’s tariffs.
Despite these challenges, overall investment sentiment remains pessimistic, according to the American Association of Individual Investors (AAII), which recently found that expectations that stock prices will fall over the next six months increased by 3.7 percentage points to 59.3%.
"Bearish sentiment is unusually high and is above its historical average of 31.0% for the 22nd time in 24 weeks," the AAII noted. "Bearish sentiment has now been above 50% for ten consecutive weeks, a record in the survey's history."
Even individuals with no direct involvement in the stock market might feel the effects of this lingering gloom, said Mark Hamrick, senior economic analyst at Bankrate.com.
"Negative headlines do take a toll beyond those who have a particular stake in the market," he observed.
According to Bob Elliott, CEO of the Unlimited Funds investment group, there are signs that the "Sell America" trade continues to linger, as indicated by the weak U.S. dollar, strong gold prices, and outperformance of foreign stocks compared to U.S. equities[6].
In summary, the market's course remains uncertain as we navigate the tariff landscape.
"It's still early," said Islam of VettaFi. "There's still a great deal of uncertainty."
- The stock market's formation was haunted by a specter of fear and uncertainty following President Donald Trump's "Liberation Day" tariffs announcement.
- On April 9th, after the April 2nd announcement, the S&P 500 suffered a staggering decline surpassing 12%.
- Such a drop usually occurs only during extreme events such as the Covid-19 pandemic, the subprime mortgage crisis of 2008, or even unexpected presidential announcements.
- With the stock and bond markets blaring danger signals, Trump scaled back some of his tariffs on April 9th, leading to a frenzy of relief among investors.
- The sell-off in Treasurys stabilized concurrently as the S&P witnessed its best daily performance in nearly 17 years, with a 9.5% surge.
- If the influx of cash into a popular low-cost investment vehicle is any indication, the recovery has been primarily driven by "retail" investors.
- According to Vanguard, the investment group that manages exchange-traded funds (ETFs), "bulls," or net buyers of stocks, outnumbered "bears" (net sellers) by a ratio of nearly 4 to 1 among self-directed investors last month.
- Stocks remain about 6% below their pre-Inauguration Day levels, with blue-chip companies like Apple still battered and Tesla 40% off its December peak.
- The market remains highly sensitive to trade deals, especially with China, which was excluded from Trump’s initial tariff pause.
- Despite these challenges, the market's course remains uncertain as we navigate the tariff landscape.
