In the Markets Now: Selloff Summary for April 21, 2025
Stocks dropped precipitously as Federal Reserve independence uncertainty and trade war persistence weighed on investor sentiment.
What Happened?
The S&P 500 fell 2.4% on Monday. The S&P Equal Weight fell 2.0%, the Nasdaq 100 fell 2.6%, and the Russell 2000 fell 2.1%.
Why Did It Happen? What’s Next?
Fed. Monday’s weakness is in large part a response to the Trump administration's push against Federal Reserve Chair Jerome Powell. President Trump has lobbed repeated criticism at Powell for not cutting interest rates, while NEC Director Kevin Hassett said the president's team is studying the possibility of firing Powell. This matters because Fed independence – i.e., its ability to carry out its duties without interference from elected officials or private enterprise – is a foundational bedrock of the US system (providing a counterbalance to elected officials’ natural bias towards short-term economic stimulation regardless of the inflationary impact down the road). It seems probable that a politicized Fed would lead to higher bond yields (rising inflation expectations) and a weaker dollar ‒ a negative cocktail for US stock performance. The Fed is also unlikely to come to the market’s rescue (a la the 2018 selloff) due to their worry that tariffs will prove inflationary.
US-China. While there has been hope for a trade war off-ramp since President Trump announced a 90-day reciprocal tariff pause, tensions with China (America’s second largest trade partner) have only continued to rise. The White House recently said China now faces up to 245% tariffs on imports due to retaliatory action (e.g., Chinese airlines halting Boeing deliveries), while also putting new export restrictions on AI chips meant for China. The latter move resulted in Nvidia – roughly 6% of the S&P 500 – taking a $5.5 billion charge to comply with new rules. Even after the 90-day pause, the average effective tariff rate is at its highest since the early 1900s. While the use of import taxes to affect the administration’s long-term goal of reindustrializing the US can be debated, the near-term impact of such a massive shock to the economic system is a net negative, and is being reflected in lower stock prices and a weaker earnings outlook.
What’s next. Most selloffs of significance end up retesting or undercutting the lows established in the initial crash. A policy selloff needs a policy solution, and while we’re potentially moving in the right direction, volatility is likely to persist as the details are hammered out. The question is whether the economy (particularly small businesses) can continue to function amid the uncertainty. Data suggests that pre-Apr. 2, the economy was on decent footing: in March, core inflation fell to its lowest in four years and the US added an above-expectation 228,000 jobs, while Q4 corporate earnings grew at their fastest pace since 2021. A protracted downturn is far from guaranteed, particularly because of how quickly tariff policy can be reversed.
Opportunity. The S&P 500 fell 12% over the four days ending April 8. Since WWII, the S&P 500 has fallen 10% or more across a 4-day stretch more than 20 times: looking forward, those periods saw the next year average a return of 30% (and with not a single down period in the bunch). Sharp crashes + historic bearishness = a lot of bad news being priced into the market at once. Most of the time, however, the outcome is less dramatic than the market’s first/worst impulse, making many sharp drops a buying opportunity.
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