In the Markets Now: Selloff Summary for April 3

Markets dropped significantly as President Trump’s Apr. 2 tariff framework was more punitive than investors had anticipated.

What Happened?

The S&P 500 fell 4.8% on Thursday, April 3, its worst day since June 2020. The index now finds itself 12.2% below the all-time high set on Feb. 19. Little was spared; the S&P Equal Weight fell 4.8%, the Nasdaq 100 fell 5.4%, and the Russell 2000 fell 6.6%.

Why Did It Happen? What’s Next?

Tariff day. From our partners at Strategas, a Baird company: “On April 2, President Trump announced a comprehensive tariff framework, which we believe is near the worst-case scenario. We estimate the proposal will generate ~$500 billion of tariff revenue on top of the $150 billion that has already been enacted. This represents 2.2% of GDP and is twice the size of the largest tax increase in modern US history.” 

Making sense of the “sell first” thinking. Baird’s Senior Analyst for Machinery & Diversified Industrials, Mircea Dobre, summed up his coverage industry’s reaction to the tariffs as such: “A ‘sell first and figure it out later’ reaction makes sense to us because […] we’ve been working through this for three months yet the sheer number of countries tariffed and the very complex Machinery/Diversified Industrials supply chains mean there is exposure that will likely take several months to fully understand and account for.” I think this framework applies to the broader market as well: investors expect that tariffs will reduce profits, but the uncertainty as to how companies, consumers, and other countries will digest these changes (and whether they will remain in place for the long-term) has intensified the selling phenomenon.

Thoughts on what’s next. Markets tend to bottom on bad news (e.g., Mar. 23, 2020), and with a capitulation event (i.e., a fear-based “sell everything” moment). Calling a bottom in real-time is difficult-to-impossible, but the combination of historic bearishness, fear-based selling, and record policy uncertainty is, oddly enough, a bullish cocktail for forward returns. Volatility is likely to persist, but as ever, it is the toll paid for access to long-term gains.

Neither the White House nor the Fed has an unlimited tolerance for pain. With so much consumer spending coming from higher income cohorts and retirees, a sudden drop in paper wealth via stock market weakness could have a more immediate negative impact on consumer spending – especially when taken in conjunction with other signs that consumer confidence is waning. A 24/7 news cycle and smartphone omnipresence should also speed up the diffusion from “stock market selloff” to “real economy weakness.” Ultimately, midterm elections are just 19 months away, and recessions tend to be bad for the campaign trail.

Longer-term, companies will adjust to the new paradigm and find ways to grow profits. Big shocks to the system have a way of accelerating change, even if it's not their intended effect (e.g., digitalization during Covid-19). If the goal of the tariffs is to level the trade playing field and bring manufacturing capacity back to the US, there is no doubt that artificial intelligence and robotics will play a role, and companies may need to figure that role out sooner rather than later. One of the things that didn’t change yesterday is the profit motive inherent to a free enterprise capitalist system. Policy doesn’t change that (case in point, from 1951 to 1964, the top corporate tax rate in the US was 50% or greater, and yet over that time frame, the S&P 500 rose 650%, or 15.5% annually). Companies are alive, and they will adapt.

Disclosures

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. Market and economic statistics, unless otherwise cited, are from data provider FactSet.

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