Day One of Trump’s Trade War Delivers Wild Ride for Wall Street

(Bloomberg) — The first trading day of President Donald Trump’s trade war with Canada and Mexico brought no shortage of drama to Wall Street.

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The S&P 500 Index tumbled 2% shortly after the open Tuesday, wiping out its $3.4 trillion advance since Election Day, Nov. 5. An afternoon rebound briefly erased the damage, but a late bout of selling left the index at its lowest level since Nov. 4, the day before Trump was elected. Meanwhile, yields on 10-year Treasuries swung 11 basis points from trough to peak, the dollar slid and Bitcoin staged a rebound. Traders who had been expecting two Federal Reserve rate cuts this year are now pricing in three, with more than 50% odds the first will come in May.

The dizzying ride provided a preview of the difficulties facing investors, who now must figure out how to price American assets in what essentially amounts to a new world order created by Trump’s tariffs on China, Canada and Mexico. To make matters more challenging, the levies arise as cracks are spreading in the US economy, consumer sentiment is cratering and inflation remains sticky.

“Buckle up because more volatility is coming,” Jay Woods, chief global strategist at Freedom Capital Markets, said by phone. “Traders are selling first and asking questions later, even with today’s technically driven rebound. Stocks are long overdue for this pullback. The real question is has ‘buy the dip’ turned into ‘sell the rip’? That remains to be seen and we’re not out of the woods yet.”

After the regular session ended, Commerce Secretary Howard Lutnick said in an interview on the Fox Business Network that Trump may announce a pathway for tariff relief on Mexican and Canadian goods as soon as Wednesday. The comments sparked a rally in after-hours trading, pushing futures tied to the S&P 500 off their lows.

Wild swings like this are nothing new for the stock market in times of deep stress. The S&P 500 posted two days of 11% rallies in the midst of the 2008 global financial crisis before plunging deeper into a bear market. When the US sovereign rating was downgraded in August 2011, the gauge rose at least 4% twice. And during the pandemic rout in March 2020, it clocked some of the biggest gains in history on the way to a bear market.

Still, the turbulence and precipitous decline from the S&P 500’s Feb. 19 high are a comeuppance for those on Wall Street who bet big on Donald Trump’s election win, trades that powered the equity market higher along with the dollar and Treasury yields. The bet that Trump wouldn’t do anything to disturb the stock market rally has, for now, been lost.

Volatility Is Here

Things could get even more dicey in the days ahead, as the first batch of economic data from February arrives, including a government hiring report on Friday. Those figures will cover the period when worries about entrenched inflation started to take hold. Meanwhile, Trump will address a joint session of Congress on Tuesday night and could stoke further trade tensions.

“There’s no question in the next six months, we’re going to have a lot of volatility and volatility is creeping up quite considerably,” Larry Fink, chief executive officer of BlackRock Inc., said at an RBC Capital Markets conference. “This is going to be a rocky year in 2025 for the markets as we try to get reoriented.”

To be sure, Trump’s policies of tax cuts and deregulation could yet juice an economy that’s shown remarkable resilience in recent months. The market turnaround turnaround on Tuesday was largely driven by dip buying in the same names that have carried the market for years – Nvidia Corp. and Alphabet Inc. chief among them.

To Fink, the wild ride shouldn’t deter long-term investors from diving in.

“If there’s a big dip, good. Good time to buy,” he said. “You’re going to be happy that you’re basically long equities.”

To get there, though, investors may have to show uncommon fortitude, as Wall Street has turned decidedly risk off. Investors have been dumping winners from the two-year stock rally that pushed the S&P 500 up more than 50% from the start of 2023. Aside from Meta Platforms Inc., the Magnificent 7 group of mega-tech stocks has been battered.

Few past winners have taken more of a beating than Elon Musk’s electric vehicle maker Tesla Inc. Its shares are down 45% from their late 2024 high after almost doubling in value between the election and mid-December on bets that Musk would benefit from his close association with Trump.

The selloff has been even more extreme in the speculative corners of the stock market. A basket of the most-shorted stocks is down 22% from its near-term high in January. An index of profitless technology companies slumped 6.3% on Monday, its worst day since December. Bitcoin has been in freefall, even after Trump once again talked up his plan for a strategic crypto reserve on Sunday.

Trouble Below

“The market is overvalued and traders are now waking up to the fact that tariffs are coming, and they don’t want to pay for companies that are trading at multiples of 30- to 40-times forward earnings,” said Max Wasserman, senior portfolio manager at Miramar Capital.

Investors have been steadily building positions in sectors that are relatively shielded from economic weakness or trade tensions, such as health care, consumer staples and financials. Meanwhile, industries that have steep valuations, substantial exposure to the global supply chain or are reliant on a confident consumer have been struggling. The technology and consumer discretionary sectors are by far the worst performers in the S&P 500 this year and the only two in the red.

The S&P 500 has been underperfoming its global peers this year, with equity indexes in China, Europe, Canada and Mexico all racing ahead. This has coincided with a steep decline in investor sentiment. Equity positioning slid sharply in the week ended Feb. 28, falling back down to near neutral and wiping out the post-election bump, according to Deutsche Bank strategist Parag Thatte.

Meanwhile, data is showing an increasingly fragile US economy. The Institute for Supply Management reported on Monday that American factory activity last month edged closer to stagnation as orders and employment contracted.

All together, market pros have been closely watching if stocks indeed wiped off all of their post-election gains, a move that some say could be key, as Trump tends to use the performance of equities as one of the scorecards of his own achievements.

The Election Day level is key to traders because if the S&P sinks below that, investors who are “currently long risk would very much expect and need some verbal support for markets from policymakers,” strategists at Bank of America led by Michael Hartnett told clients in a note in late February. Now it’s up to Trump to respond.

–With assistance from Alexandra Semenova.

(Updates share prices throughout.)

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