Key Takeaways
- Markets Suffer Historic Losses Amid Tariff Shock And Recession Fears
- Panic Selling Spreads Globally As Uncertainty Fuels Investor Anxiety
- Upcoming Earnings And CPI Reports May Influence Market Direction
Well, that happened. Thursday and Friday marked two of the worst days I’ve ever witnessed and that it happened on consecutive days makes it all the more remarkable. The S&P 500 dropped over 9%. The Nasdaq Composite lost over 10% and is now in a bear market, down over 20% from its peak. Small caps dropped 9.5% and have fallen 25% from their high. And the Dow Jones Industrial Average lost 8%, putting it in a correction with a loss of nearly 15% from its November peak.
Last Wednesday, President Trump announced his tariff policy, and it was far more aggressive than most anticipated. In 2024, the effective U.S. tariff rate was 2.5%. The new policies push that rate up to 22.5%, according to Yale Budget Lab. Nearer term, that means Americans will have $3,8000 less in purchasing power. The result last week was over $6.6 trillion in market value was lost in the last two trading sessions. As reported by The Wall Street Journal, J.P. Morgan is equating this to the largest tax increase since 1968. In addition, J.P. Morgan is forecasting the odds of a recession are now 60%.
The concerns over a recession are visible not just in the equity market, but commodities as well. Oil prices dropped below $60/barrel for the first time since 2021. Interest rates have been falling, with the yield on the 10-year note hitting as low as 3.88% last week. We even saw a massive run-up in gold leading into the announcement in a sign that investors were concerned about a slowdown.
One of the things that would help restore the market confidence is a clearer explanation of what the end goal is. Is it to lower rates to refinance upcoming debt? Or is it to ultimately lead to lower taxes? This is the part where the market needs some guidance, as without an explanation, others will fill the void. Because of this we’ve seen indiscriminate selling with some of the heavier unloading taking place where investors have the greatest profits. Stocks like Palantir, Meta Platforms, Nvidia, Apple, have all been hit hard. The crazy part is, the selloff has remained orderly, there have been a few moments that felt like panic, but overall, this has been surprisingly calm. What we have seen is a definite desire for options protection, with the VIX at 50. What is concerning on this move is that Friday was the largest trading day ever in listed options and according to Goldman Sachs, the largest number of shares traded in one day. The reason that’s concerning is because it can often perpetuate the momentum already in place.
This selling isn’t just here in the U.S. Markets in Asia and Europe all saw heavy selling. Overnight, Hong Kong’s Hang Seng Index fell 13.2%, the biggest single day percentage drop since October of 1997, according to The Wall Street Journal. Selling in Europe was also intense, though not as bad as what took place in Asia. The Stoxx Europe 600 fell by 4%.
What we’re seeing right now is what I consider to be a gamble. If Trump can get other countries to lower or eliminate tariffs altogether, this will be a big win. But that’s a big if. It’s also very hard to negotiate in public where counterparties understand what it is you ultimately want. Therefore, from a geopolitical economic perspective, this is unlike anything we’ve ever seen. What I also find interesting with this is how it will impact global trade and infrastructure investing in the longer-term.
The tariffs aren’t the only news. Later this week, earnings season will get underway with banks such as J.P. Morgan reporting before the open on Friday. I imagine earnings season will be more heavily scrutinized than usual, with analysts and investors alike eager to hear what companies have to say about their outlook. Friday is also when the next Consumer Price Index (CPI) report will be released. Because that report is backwards looking, it will not reflect the new tariffs. We’re also going to get the NFIB Small Business Optimism Index tomorrow. I wouldn’t normally bring this report up, however, with talk of a recession so prominent, this could be one of those news items that gets more attention that it might otherwise.
For today, I’m expecting a continuation of the choppy trading. The VIX is near 50 in premarket and that means there is an implied intraday move in the S&P 500 of around 3%. Times like these are stressful and they can also lead to panic. Very little good ever comes from decisions made while panicking. It’s also not uncommon, following a major move lower like this, to see a “dead cat bounce” with a strong rally. I’ll be interested to see if, once we have that rally, equities can hold or if they resume their move lower. As always, I would stick with your investing plans and long-term objectives.
tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.
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