US Markets in Red as Tariffs Take Toll

As concerns over stagflation mount, the latest salvo in trade wars has precipitated a decline in US equity markets, pushing them into negative territory for the year.

It's Been a Tough Quarter

On Monday, the markets concluded their worst-performing quarter in three years, with the S&P500 down 5% year-to-date (YTD) and significantly lower than the record high it reached in early February before the White House announced retaliatory tariffs implemented this Wednesday. This downturn also follows the surprise arrival of China's DeepSeek AI, which led to a drop in the large AI-based tech stocks that had contributed to the stock market rally over the past couple of years. It's a setback for traders who had cheered a business-friendly administration in November, with all gains since the election being erased.

As the correction reached a fever pitch in March, fund managers sold a record number of stocks, according to a Bank of America survey, with fears of stagflation being the primary concern. The combination of high inflation and sluggish economic growth makes it hard for the Fed to address the situation and support growth. This record rotation also had some unusual components. While a general risk-off move would typically see fund managers buying Treasuries, the largest funds were shifting out of the US and into Europe. Increased spending on defence and infrastructure is expected to boost the economy and has helped generate outperformance in equities.

Any Chance of a Rebound?

Economists dubbed Wednesday's "Liberation Day" tariff announcement "worse than anticipated" as futures sold off following US President Trump's announcement of across-the-board tariffs of at least 10% on virtually every country in the world. The S&P 500 fell 4.8% on the first trading day after the announcement, the worst single-day performance since the COVID-induced crash of 2020, with losses being widespread. The Russell 2000, which lists smaller companies presumed to benefit more from easing regulatory requirements, sank 6.6%, 20% below its February peak.

The silver lining could be a significant downturn convincing the Fed to lower rates sooner than anticipated. The yield on the benchmark 10-year Treasury fell to 4.04%, a notable drop from the 4.2% before the announcement. However, the futures market hasn't changed all that much just yet, with the prior 90% expectation of a hold for the next FOMC meeting in May dropping to 70%. Analysts suggest that it will be difficult for the Fed to ease enough to support the markets in the near term, as the tariffs are expected to have an inflationary impact. The Trump Administration seems satisfied with the results of the tariffs, reducing any hopes that the market downturn could prompt a softening of the White House's stance. For now, markets appear inclined towards the downside, waiting to see if data such as the NFP and upcoming CPI figures will provide some form of floor to bounce off.

S&P500 Dead-Cat-Bounce Decline Pending?

The S&P500 appears to be forming the second leg of a potential dead-cat-bounce pattern after completing an ending wedge at 6150, pointing to 4860 per the measured-move projection from the breakout at 5500. Intermediate supports are situated at 5280 and 5090. However, if prices reverse above the breakout point and the 5800 swing high, the low might be in for the time being.

Source: SpreadEx / S&P500

Key Takeaways

The trade wars have precipitated a decline in US equity markets, pushing them into negative territory for the year and the worst-performing quarter in three years as concerns over stagflation mount, with the S&P 500 benchmark index down 5% YTD. Economists dubbed Wednesday's "Liberation Day" tariff announcement "worse than anticipated", as futures sold off sharply following across-the-board tariffs of at least 10% on virtually every country in the world, leading to widespread losses.