Steadiness is not an adjective associated with investors. They are the first to sense a storm. In a rush to secure their wealth, panic leads to chaos shaking up the markets.
The potential economic fallout from President Donald Trump’s latest tariffs was expected. And so, in an overreaction, quite similar to the one witnessed during the COVID-19 outbreak, which impacted both domestic and international investors, Wall Street took massive blows.
Trump maintained an optimistic outlook. As he departed for his Florida golf club, he expressed confidence about the market’s struggles, likening the situation to a major surgical procedure that might have a slow recovery, yet is essential.
Back to the markets. The S&P 500 dropped by 4.8%, marking its most volatile moment since the market crash in 2020. Major indexes in Asia and Europe also felt the impact.
The Nasdaq composite fell 6%, and the Dow Jones Industrial Average dropped by 1,679 points, or 4%. S&P Dow Jones Indices senior index analyst Howard Silverblatt claims investors witnessed a loss of over $2 trillion in market value.
Mary Ann Bartels, chief investment officer at Sanctuary Wealth, described it as a “worst-case scenario for tariffs.” Trump unveiled a minimum 10% tariff on imports, with even higher rates targeting specific products from countries including China and the European Union. UBS cautioned that these tariffs could potentially slash US economic growth by two percentage points and push inflation close to 5%.
It also brings into question the rational expectations of tariffs being maintained at these levels.
Wall Street had been operating under the assumption that the tariff was Trump’s negotiation card. The announcement raises doubts. Does he truly consider the tariff change as a long-term strategy aimed at achieving ideological objectives, such as revitalising manufacturing jobs in the US?
Meanwhile, analysts remain apprehensive of further drop in stock prices (potentially over 10%) to account for imminent recession that could arise alongside reduced profits for US companies. As of now, the S&P 500 is down 11.8% from its peak in February.
The Federal Reserve could consider cutting interest rates to support economic stability, as it had done in the past year. Lower rates would ease borrowing for U.S. companies and households, potentially cushioning the economic impact. As a result, bond yields fell, with the yield on the 10-year Treasury decreasing from 4.20% to 4.04%.
However, the Fed may encounter challenges in its actions since lower rates could contribute to higher inflation. Tariffs are already feeding inflationary fears, particularly for US households reading themselves for price hikes.
Yet, the general sentiment remains optimistic. The US economy is still in a growth phase. A recent report, alluded to by a business portal, hinted at a decrease in unemployment benefit claims, surprising many economists who had anticipated an increase. Another report on business activity in the services sector also suggested growth, though weaker than expected, with businesses expressing mixed outlooks for future conditions.
