Trump’s Tariffs Create Turbulence in US Stock Market

Trump’s Trade Policies Impact Market Sentiment

Since leaving the White House, Donald Trump has voiced concerns about foreign countries like Japan, China, and Germany benefiting from lax U.S. trade policies. Now, during his second presidential term, he plans to impose retaliatory tariffs to address trade imbalances, combat fentanyl trafficking, and revitalize American manufacturing.

As a result, Wall Street appears skeptical about the tariff approach. The S&P 500 Index ETF (SPY) has dropped 5% in the past month. Increasing market volatility, coupled with intraday comments from Trump and his economic advisors, has led to abrupt market shifts. Investors now question whether their reactions to the tariffs are overblown.

Market Corrections Are Expected, Even in Bullish Trends

The S&P 500 Index has surged roughly 40% since hitting bottom in October 2022. However, seasoned investors recognize that market movements are rarely linear. Historically, the current bull market has seen multiple 5% corrections. It is possible that investors were simply waiting for an impetus to sell, and the tariff announcement provided that spark.

Anticipated Market Corrections Linked to Election Cycles

In recent years, historical seasonality trends have shown considerable accuracy in predicting market fluctuations. Even before the tariffs were declared, seasonal patterns indicated that weakness in equities during the first quarter was likely. However, this downturn usually dissipates, with markets often finding a bottom in late March.

Image Source: Hirsch Holdings, (@almanactrader)

Historical Context: A Familiar Scenario

Investors can draw on historical examples. Tariffs were previously implemented during Trump’s presidency, setting a precedent for the current situation.

Image Source: Zacks Investment Research

Staying Above the 200-Day Moving Average

Since the lows of 2022, the market has consistently remained above the 200-day moving average. While the Nasdaq 100 Index ETF (QQQ) has tested this average multiple times, it has consistently found support. Investors now wonder if this trend will continue.

Image Source: TradingView

Positive Volatility Above the 200-Day MA

Ryan Detrick, Chief Market Strategist at Carson Investment Research, noted a potential upside:

“Historically, when the S&P 500 experiences five consecutive days of 1% changes while staying above its 200-day MA, it tends to perform well in the following six months, averaging an 11.0% gain and rising 91.7% of the time.”

Likelihood of Interest Rate Cuts Increases

The Trump Administration has been advocating for lower interest rates for some time. Although the Federal Reserve operates independently, current market signals indicate that tariffs may influence Fed Chair Jerome Powell’s decisions. The probability of rate cuts in May is already at 54% and appears to be on the rise.

Prospects for a Tariff Resolution

While Trump claims he intends to maintain these tariffs indefinitely, it’s important to observe actions rather than words. It is likely that he views tariffs as a negotiating tool for more favorable trade agreements. Positive signs of resolution are beginning to surface; Trump recently stated:

“After speaking with President Claudia Sheinbaum of Mexico, I have agreed that Mexico will not be required to pay tariffs on anything that falls under the USMCA Agreement. This agreement lasts until April 2^nd. I made this decision in respect for President Sheinbaum. Our relationship has been very productive as we work to address border issues and curb fentanyl trafficking.”

This softer tone between nations offers some reassurance to investors.

Market Valuations Reflecting Caution

Investors have long expressed concerns over tech stocks, particularly Tesla (TSLA) and Microsoft (MSFT), which have recently shown signs of lower valuations amid market uncertainty.