U.S. stock market has wiped out $9.6 trillion since Inauguration Day – $5 trillion of which evaporated between April 2 and April 4 which is “the largest two-day loss on record,” according to MarketWatch.
Here are three questions that come to mind and quick answers:
- Why? Stocks dropped due to President Trump’s tariffs and the resulting economic uncertainty.
- Will stocks keep dropping? Stocks may continue to plunge unless tariffs are lifted.
- What should investors do? Investors should avoid panic selling and ought to evaluate whether to diversify by placing bets – such as buying options on the Chicago Board of Trade’s Volatility Index – which measures expected 30-day volatility in the S&P 500, according to Bloomberg – tends to rise in value as stocks fall.
Five Whys Analysis Of $9.6 Trillion Stock Market Drop
The root cause of this rapid loss in stock market value is the expectations-beating magnitude and breadth of Trump’s tariffs and the belief that the resulting uncertainty will result in economic contraction and lower stock prices.
Here is a “Five Whys” analysis on which to base this conclusion:
- Why has the U.S. stock market lost $9.6 trillion in value since January 17, 2025? The stock market declined due to the implementation of Trump’s tariffs which reduced investor confidence and caused “massive sell-offs,” according to MarketWatch.
- Why did Trump implement these new tariffs? Trump aimed to reduce the U.S. trade deficit – to rectify what he views as other countries taking unfair advantage of America – and to promote domestic manufacturing, Axios reported.
- Why did the tariffs affect investor confidence and lead to sell-offs?Investors feared that the tariffs would increase costs for businesses, leading to higher consumer prices (inflation), reduced corporate profits, and potential retaliatory measures from other countries, all of which could slow economic growth and potentially lead to a recession, noted BusinessInsider.
- Why would increased costs and retaliatory measures slow economic growth?Higher costs from tariffs can reduce consumer spending power and corporate profitability. Retaliatory tariffs from other countries can decrease U.S. exports, further harming businesses and potentially leading to job losses, thereby slowing down the overall economy, according to The Guardian.
- Why did the market react so strongly and rapidly to these tariff announcements? The scale and abrupt implementation of the tariffs – in March, investors were expecting tariffs to rise 8.6 percentage points in 2025 while Trump raised them nearly 20 percentage points on April 2, noted the Wall Street Journal. This raised investor uncertainty – prompting swift adjustments to their portfolios in anticipation of negative economic impacts, leading to a rapid decline in stock prices, noted by April 3 Forbes post.
Will Stock Prices Keep Dropping?
The forces pushing stock prices down are likely to prevail over those sending them back up. So, I think stock prices will continued to drop.
Bearish analysts warn of a recession and others expect stock prices to fall further.
Recession odds are rising abruptly. The probability of a global recession increased from 40% to 60%; gross domestic product will contract 0,3% in the fourth quarter of 2025 and unemployment will rise to 5.3% in 2026, according to a note from JPMorgan’s head of economic research Bruce Kasman featured in the Journal.
Whether the bears are right depend on whether tariffs – which now average around 22.5%, noted the Journal – stay where they are or go higher due to retaliation from other countries and a U.S. response.
High tariffs could increased prices across the board by double-digits — causing global stagflation and thus sending stocks down further. That’s because companies are more likely to fall short of revenue and profit growth targets as they either raise prices to preserve profit margins which will reduce demand or maintain current prices which will squeeze their margins.
Another analyst expressed fear of a trade-war escalation, where “the U.S. doesn’t back down, Freedom Capital Markets chief market strategist Jay Woods emailed MarketWatch. ”If we are to punch back, you could have damaging effects to not only the tech sector, but the economy overall. This could throw us into a recession and could end the bull market as we know it,” Woods added.
If the current economic uncertainty is replaced by optimism and better than expected growth, stock prices will rise. However, to increase the odds of an optimistic outcome, tariffs would need to decline below March’s 8.6% rate and Trump stops changing his mind about tariffs every few days.
What Investors Should Do
Having held on to my stocks during previous market crashes, I am inclined to see the wisdom of avoiding panic selling. However, I think it may be worth considering whether to place a bet on continued uncertainty.
Since Trump took office, the VIX has soared 184%. Since the VIX came into existence in 2004, it has only spiked higher twice: during the peak of the financial crisis of 2008 and at the beginning of the Covid-19 pandemic.
What if Trump’s tariffs raised fear to levels not seen since 2004? Anticipating this outcome may well be what motivated some prescient traders to bet the Vix would rise a few days after Trump took office, according to my March 5 Forbes post.
Their wager would be profitable if the Vix were to top 50. Since March 5, it has risen 89% to $45.31.
One way investors could choose to diversify is to buy an exchange traded fund whose value tracks an increase in the VIX – such as ProShares VIX Short-Term Futures ETF (VIXY).
Investors may wish to consider the potential benefits, costs, and risks of this strategy. To illustrate, let’s assume an investor wanted to bet $100,000 – purchasing 1,333 shares of VIXY at $75/share – on a rise in the VIX from 45 to 80 by June 4, 2025.
The worst case scenario is losing all $100,000 if VIXY drops to zero – which is unlikely unless that market suddenly became completely calm. If the market suffers even bigger shocks in the future, the VIX could rise in value.
However, often the VIXY spikes on a large injection of fear – but later gives back its gains when that fear recedes. Even in August 2024, when volatility was unusually high, VIXY ended the year in the red.
The reason? Markets eventually calmed down “while that persistent rolling cost ate away at VIXY’s net value,” according to TipRanks.
However, if Trump keeps raising the bar on market fear, the VIX could rise to $100,and that VIXY holding could be worth $250,000 – yielding a $150,000 profit after subtracting the purchase price.
If you don’t want to deal with all that risk, make sure you have deep pool of funds outside of stocks – such as a money market fund which is likely to maintain its yield as tariffs boost inflation.
Read the full article here
