Wall Street plummets as tariff-war woes fuel exodus from US assets

Trump’s chaotic tariff rollouts — regardless of where they eventually settle — is rapidly undermining confidence in the US economy. Bloomberg

Less than 24 hours after President Donald Trump backtracked on his once-in-a-century trade war to prevent a meltdown in financial markets, frantic selloffs hit US stocks, bonds and the dollar yet again as fears of a worldwide recession engulfed Wall Street.

The S&P 500 Index ended the day down 3.5% as investors seized on Wednesday’s historic rebound to sell. Long-term Treasuries sank, sending yields soaring after a brief respite. The dollar tumbled for a third day as traders liquidated US assets in favor of haven currencies like the Swiss franc, which surged by the most in a decade. Meanwhile, oil prices fell further.

In a measure of how volatile markets have become since Trump announced his plan to impose punitive tariffs on dozens of America’s trading partners, the S&P 500’s gyrations in the past two trading have rivaled those unleashed by the pandemic and the 2008 financial crisis.

The moves, in the end, all pointed toward the same sobering conclusion: Trump’s chaotic tariff rollouts — regardless of where they eventually settle — is rapidly undermining confidence in the US economy and threatening to keep markets on edge for the next three months as traders wait to see how it will all play out.

“The reality of this being over quick and us returning to happy days quickly is very, very low,” said Bill Smead, chief investment officer at Smead Capital Management. “This is the beginning of a monstrous bear market.”

That fear is indicative of how much sentiment has shifted less than three months into Trump’s second term, one that Wall Street once wagered would fuel the stock market’s bull run by slashing taxes, rolling back regulation and driving the economy’s growth.

But those expectations have rapidly reversed as Trump moved to fire tens of thousands of employees, withheld federal aid and moved to single-handedly rewrite the rules of global trade in America’s favor.

“I definitely see investors taking money off US assets and looking for safe haven, which might be more cash/gold than anything else,” said Xin-Yao Ng, Singapore-based investment director at Aberdeen Group Plc. “I heard even in US Treasuries, many investors have no conviction.”

As much as the tariffs themselves, concerns have deepened because of the president’s approach — including on-and-off again rollouts, unusual formulas used to set them, an unorthodox objective, and his decision to keep escalating the conflict with China, which instead of being exempted from Wednesday’s reprieve was hit with another round of retaliation.

That’s made it difficult for Wall Street analysts to forecast how it will all play out, much less reckon what it will ultimately mean for the prices of stocks, bonds and commodities.

Developing-Nation Status

“Even in emerging markets we have an idea what policies are,” said Kim Forrest, chief investment officer and founder of Bokeh Capital Partners. “But here in the US we can no longer do a fundamental analysis of some of the best companies.”

That’s erupted in six dizzying days of trading since Trump announced his latest tariffs in the White House Rose Garden. The initial shock unleashed deep stock selloffs that erased more than $10 trillion of value. It also strained bond markets from Tokyo and Australia to the UK and the US dumped government debt to raise cash.

In the US, the selloff sowed speculation that the Federal Reserve would need to step in and stabilize the market as yields kept marching higher, threatening to deal the economy another jolt by pushing up the cost of borrowing across the financial system. When that drove him to call off some of the steepest tariff hikes that had just kicked in for many countries, the 30-year Treasury yield slid as markets appeared to pull back from the brink.

But in the background, the trade war is still threatening to break supply lines, cut cross-border trade and deliver another inflation shock to US consumers as imports grow more expensive. All of that has left Wall Street increasingly worried that the economy will stall.

“We will get a recession, because that is what the trade war will create,” Que Nguyen, chief investment officer of equity strategies at Research Affiliates. “And he won’t back off unless we get to the brink of a depression. So equity markets are rationally pricing in a recession.”

That view made relief short-lived. When stock markets reopened on Thursday, prices swooned sending the S&P 500 down more than 6% before it recovered part of the decline. The VIX — known as Wall Street’s “fear gauge” — fell by the most ever as stocks soared after Trump announced a 90-day pause on some tariffs. On Thursday, it has popped back above 40, a sign of increasing jitters in the market.

In the Treasuries market, long-dated debt tumbled again, even after the results new bond auctions over the last two days eased concerns about demand. But other worries have continued to drag on the market, including the risk of rising inflation, a pullback by overseas buyers, or a swelling US deficit if growth stalls.

“It’s hard to imagine the worst is behind us,” said Jamie Patton, co-head of global rates at the TCW Group Inc. “Risk assets don’t like uncertainty and volatility. And that’s exactly what this administration is giving us.”