As we expressed in the 76report on Monday of this week (Will Trump Pivot?), the market fall-out from the Liberation Day tariff schedule was immensely problematic.
The primary intention of rolling out aggressive tariffs, with a particular focus on nations running severe trade surpluses with the U.S., may have been to bring countries to the table.
But tariffs were overall set at extremely high levels which were seen by investors as a major threat to economic growth and corporate earnings.
Estimates for the Effective Tariff Rate after Liberation Day were around 22%. (This is basically the weighted average tariff rate applied to all countries.) Wall Street was hoping for something closer to 10%.
Why stocks fell
Markets cratered because tariffs at such high levels would potentially lead to a global recession.
From the close of trading on Liberation Day, just before the news came out, to the moments just prior to Trump’s 90 day pause announcement, the S&P 500 Index had fallen approximately 11.5%.
While the prevailing view was that tariffs around 10% were manageable, tariffs at 22% would constitute an enormous demand shock for consumers as well as a source of immense disruption and uncertainty for businesses.
Wall Street was especially anxious given that bad economic developments also have a way of snowballing. A sharp stock market decline in and of itself leads to negative wealth effects and reduced consumer spending and confidence.
On top of this, economic shocks can lead to stress on the financial system that causes things to “break” in unpredictable ways, leading to new fires that need to be extinguished.
As expected, Trump did pivot
The primary reason we expected Trump to change course on tariffs and flagged the recent sell-off as a long-term buying opportunity was that the initial approach simply did not serve the administration’s interests.
While Trump certainly got the world’s attention, no politician or political movement can rationally expect to succeed if its economic policies cause a recession and market collapse.
Trump was elected in large part because voters wanted a strong economy, not a catastrophe (like the ~20% cumulative inflation they experienced in the Biden term). And mid-term elections are only about a year and half away.
