The past few weeks have been among the most volatile for the US stock market in American history. Stocks sold off sharply after the Trump administration’s signature tariff policy was implemented, rebounded just as quickly when a delay in the tariffs was announced and then fell once again as a trade war shaped up between the US and China.
With the trading week finally over, let’s take a look at where the market settled and whether or not it managed to find a bottom amid the shocking volatility.
Are We Technically in a Bear Market?
Although the last several trading days have been historically volatile, the market technically hasn’t managed to slip into bear territory yet.
While the market certainly got close immediately after the tariffs were implemented, the S&P 500 hasn’t yet crossed the threshold of selling off by 20% or more from its recent high point.
In terms of stock market performance, this makes the current economic turmoil far less severe than other financial crises in recent decades, at least so far. For reference, the selloff associated with the pandemic in 2020 triggered a 33.9% drop, while the financial crisis at the beginning of the Great Recession saw stocks sell off by 56.8%.
Where Do the New Tariffs Stand?
By far the biggest drag on the market at this exact moment is the ongoing trade war between the US and China kicked off by the Trump administrations so-called “Liberation Day” suite of tariffs.
After multiple rounds of escalation by both sides, the US now has a 145% tariff on goods coming from China, while China is imposing a 125% tariff on US goods.
Markets outside of China also haven’t been granted a permanent reprieve from the effects of higher tariffs. While the administration delayed the implementation of much higher rates, a 10% baseline tariff remains in place. The delay is also only a 90-day period during which countries can attempt to negotiate new trade agreements with the United States.
Cumulatively, it appears that the US economy is far from being out of the woods where the negative effects of tariffs are concerned. An analysis conducted by the Budget Lab at Yale University suggested that a 20% tariff on China and a 25% tariff on Canada and Mexico alone would shrink real US GDP by 0.6% in 2025.
The levy on Chinese goods is now more than seven times what that analysis assumed. Canada and Mexico have been excluded from the administration’s latest tariff push, but it seems very likely that the total weight of tariffs could produce a significantly greater contraction of the American economy.
Other Economic Headwinds on the Horizon
While most of the worries in the market right now tie back to higher tariffs in one way or another, their effects could be complex and wide-reaching. Among these downstream effects is the potential for higher inflation. Even though March’s inflation numbers came in unexpectedly low, the forward effects of massive new levies on imported goods could be deeply negative for businesses and the economy at large.
The impact of the tariffs on consumer budgets is expected to result in an average loss of $4,700 of purchasing power per US household. Economists are also predicting inflation to move higher again to around 4%. Unemployment is likely to rise as businesses trim their budgets to offset the rising costs of goods and materials.
As pointed out by noted investor and hedge fund manager Bill Ackman at the height of the debate over tariffs, unusually high tariffs are also likely to disproportionately affect small businesses, sending many into bankruptcy.
Though this doesn’t directly impact the large companies that make up the vast majority of the US stock market, it’s important to keep in mind that small businesses employ almost half of all American workers. A sudden spike in bankruptcies could put many consumers out of work, reducing overall demand and pressuring revenues and earnings at large, publicly traded companies.
Without a permanent easing of tariffs, the end result of all of this could very well be a period of stagflation. With the Federal Reserve likely to be hesitant to reduce interest rates for fear of sending inflation even higher, economic growth could remain fairly anemic. Such a period could be quite a difficult one of US stocks, especially given the unusually high valuations they have been sustaining up until very recently.
So, Has the Market Bottomed?
Right now, the market’s trajectory may hinge on the ability of the US and China to reach some kind of trade agreement.
If triple-digit tariffs come off fairly quickly, the remaining 10% tariffs on other countries, while harmful to the economy, probably won’t exert enough gravity to hold stocks down near their present levels.
If Chinese goods face ongoing 145% tariffs when coming in or if efforts to negotiate trade deals with other countries break down, however, the market could still have much more room to fall.
Given that most bear markets significantly exceed the 20% drop threshold, it would be far from unusual to see more downside in the wake of such a huge economic upset.
It is worth noting, however, that this big picture view is somewhat at odds with the viewpoint offered by technical analysis. Historically, periods in which the S&P 500 sells off as aggressively as it did on the two consecutive days of near free-fall we experienced last week are rarely followed by further losses.
If technical analysis and market history have predictive power in today’s market, there’s at least a reasonable chance that the market has already bottomed.
In the end, the only near-certainty at the moment seems to be that the US stock market will probably remain very volatile until a clear resolution to the current trade war concerns presents itself.
Investors, hedge funds and major banks are all carefully watching for the next developments in the deeply uncertain global trade situation. Those developments, along with their downstream effects, will likely determine what direction the market takes next and whether a bullish or bearish trend persists from this point forward.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
