In just two trading sessions, the S&P 500 lost 10% as the stock market shed $6.6 trillion in market value. It was the largest two-day loss in history.
While the stock market has been pulling back since the peak on February 19, the downside accelerated quickly after President Trump announced a massive round of new tariffs.
In addition to a a new 10% tariff on all imports into the U.S., other countries also face much higher extra rates. For instance, the tariff rate on imports coming from China could top over 60% following the latest round of increases.
As a result of the scope and scale of new tariffs, the weighted average tariff rate will significantly surpass the rate seen after the Smoot-Hawley Act that helped drive the Great Depression (chart below)
Even before the latest trade war escalation, there were signs that tariff policies were impacting business spending and consumer sentiment surveys. Last week, the the new orders component of the ISM manufacturing report declined sharply to 45.2 from 48.6 the prior month. New orders are a leading indicator of economic activity, where a reading below 50 in the ISM report indicates contracting activity.
And if investors are hoping for help from the Federal Reserve, they might be waiting awhile. During speech on Friday, Fed Chair Jerome Powell reiterated the central bank’s “wait and see” approach.
Powell also stated that the central bank’s “obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”
That shows the inflationary implications and concerns from more tariffs. At the same time, lagging indicators of labor market activity is not sparking any warning. The March payrolls report showed 228,000 jobs created for the month compared to estimates for 140,000.
A solid payrolls report and concerns over the inflation outlook means the Fed is on the sidelines for now.
With uncertainty running rampant and stocks plunging, sentiment and breadth indicators are hitting even more extreme washout levels. In this week’s update, let’s take a look at the historic magnitude of last week’s decline, various metrics showing capitulation, and what it means for forward returns.
