Since the start of the century, the world has witnessed many economic dislocations, like the bursting of the dotcom bubble to the global financial crisis, to name a few. Each of them had a different characteristic and resultant impact on the economy with regards to the length and intensity of their effect and the recovery thereof. For instance, the global financial crisis of 2008 resulted in the erosion of more than 50 percent of world market capitalisation, which took till March 2014 to rebound. The corresponding fall in the World Trade Volume Index was 20 percent, which recovered to its previous peak by March 2012. Both market capitalisation and economic activity took a significant amount of time to get back to their previous level.
However, the current tariff wars are more of a man-made reset and need to be viewed with another lens. Donald Trump’s re-election as the US president brought some cheer to the financial markets despite foreboding about his agenda to revamp global trade with the aim of bringing jobs back to America and reducing the fiscal deficit burden. Those fears prove true to an extent thanks to his “shock and awe” strategy of posting sporadic and contradictory views on social media. The equity benchmark indices started a downward spiral in the last month of 2024 before stabilising in January 2025.
Market volatility resumed after Trump took oath as the 47th president of the US on January 20. Heightened volatility persisted across asset classes including equity, debt, commodities and currency markets thanks to Trump taking to his Truth Social platform to comment on a variety of topics ranging from sharing views on the dollar to reducing the deficit to what the US Federal Reserve chair should do to bring back jobs.
The period of uncertainty reached a new high on April 2, anointed Liberation Day, with the announcement of tariffs on various countries in a move to reset the global trade status quo. As a result, world market capitalisation witnessed the highest drawdown of 15 percent since the start of the calendar year. That translates to erosion of $20 trillion of market capitalisation. It may so happen that the event which marked the culmination of his “shock and awe” policymaking may have also heralded the end of peak uncertainty for the markets. This seems counterintuitive to his earlier actions, and we dwell down as to why we believe “peak volatility” is behind us. This doesn’t mean Trump's posts on social media will not impact markets' daily moves, but the range of scenarios that were very wide when he assumed office are likely to narrow.
The uncertainties can subside owing to two major factors. First, the economic data coming out of the US is expected to be weak in the next couple of quarters. This will lead to accentuated pain for the common man. The announcement of tariffs has disrupted supply chains and raised questions on availability of products and the cost of goods. Businesses are navigating through uncertainty and unpredictability due to a decline in consumer sentiment.
If the sentiment does not improve by the end of this year (holiday season in the US), it could lead to an even more challenging time. At the end of the day, one must remember that Trump has operated as a businessman for over 40 years and understands the nitty-gritty of doing business. Would he want to leave a legacy where businesses must continuously deal with uncertainty that eventually leads to decision paralysis? Second, in the US, the political party often prevails over the president and with a aspate of elections ranging from electing governors and mayors to state legislatures coming up next year, the Republican Party would want to appeal to the moderates to maintain its position given their current slim majority. This necessity could lead to a softening of stance on policies.
The US 10-year bond yield could be another variable that the Trump administration would be keenly monitoring. If the yield moves closer to 5 percent, it will surpass the nominal GDP and set off alarm bells as the US is already dealing with high levels of debt. That would put additional pressure on policymakers to avoid any further destabilising actions. A combination of economic, political and market-related events could lead to a moderation in resetting global trade policies than what Trump started out with.
The big question to ask is whether we have encountered a man-made reset in the past in India and if so, what lessons were learnt from it. India’s demonetisation in November 2016 is the closest example that comes to mind. Initially, the markets reacted violently but were quick to recover lost ground, even as the range of expectations that the economy would grapple with the situation and evolve were very wide during that short period of three to six months. As time progressed, the learning was that the economy and economic cycles are far less fragile than what most analysts had predicted.
While we did not go back to status quo, we witnessed the emergence of a super-trend following the man-made reset, i.e., formalisation of the economy post-demonetisation. Similarly, the man-made reset in the US will result in large-scale changes. The fear of an extended period of economic freeze or complete collapse of trade seems unlikely now. The solution will lie in treading a middle path, such as intervention by the central bank or adjustments to the fiscal deficit by prudent policy decisions.
Just like water finds the path of least resistance, economies and markets too will evolve along the lines of the super-trend of the future. Rather than taking a despondent view of markets, one will be better served by following the massive super-trends that will emerge and take advantage of the opportunities it will likely create for businesses.
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