The stock market remains uncertain as investors grapple with President Donald Trump’s whipsawing tariffs and budget cuts. The administration’s on-again, off-again threats of tariffs, refusal to rule out severe economic downturns followed by reassurances, and chaotic cuts to the federal government have created a profound sense of uncertainty in the market. For many of Trump’s supporters, the president is doing exactly what he should do as a savvy negotiator: keeping trading partners like China and Mexico off balance to gain the upper hand.
However, for investors, such dizzying shifts have made the stock market “untradeable,” according to George Goncalves, head of U.S. macro strategy at MUFG Securities. “The volatility does not make this easy,” Goncalves admitted. It’s a challenging environment to have any conviction to hold a view.
Investors are left guessing; the risk is that this uncertainty could come at a real cost to the economy.
As trade policies fluctuate and government budget priorities shift, the stock market’s unpredictable nature keeps both Wall Street and Main Street on edge. The market embraced Trump for much of his first term and has turned on the president. The Dow Jones Industrial Average fell 10% from an all-time high set just three weeks ago and is approaching correction territory.
The tech-heavy Nasdaq experienced a similar fate, and the Russell 2000, comprised of smaller businesses, has fallen a stunning 18.4% from its high after the election. The stock market is losing its confidence in the Trump 2.0 policies,” said Ed Yardeni, president of Yardeni Research. Traders are increasingly concerned that Trump’s policies could significantly damage the economy.
Despite Trump’s insistence that stocks are falling due to inflationary problems inherited from former President Joe Biden, the market had boomed after his November election in hopes that promised tax cuts and deregulation would fuel another economic boom.
Stock market uncertainty amid Trump’s tariffs
However, Trump’s actions before taking office have exacerbated market instability.
“This market is just blatantly sick and tired of the back and forth on trade policy,” said Art Hogan, chief market strategist at B. Riley Wealth Management. Uncertainty about tariffs paralyzes businesses that are unsure whether to hire and invest.
Mass layoffs of federal workers could seriously damage local economies, and immigration crackdowns could hurt the already labor-sapped health care, construction, and agriculture industries. JPMorgan economists recently increased the likelihood of a U.S. recession this year to 40%, up from their initial forecast of 30%. They cited a “less business-friendly stance” from U.S. policy, including a more aggressive trade war and efforts to slash federal hiring and spending.
The steep decline in the stock market could soon force Trump to reconsider his stance on tariffs. Marko Papic, the chief strategist at BCA Research, suggests that a 15% to 20% decline in the S&P 500 could force Trump to backpedal on his trade war. For sure, he’s going to care about the stock market because he will lose political capital if the economy goes into recession or if households feel poor,” Papic commented.
Papic predicts that other checks on Trump’s authority will emerge if economic and financial volatility persist. A weakened economy could motivate Republican senators or representatives to dissent and challenge Trump’s agenda, potentially leading to changes in his political landscape. As the situation develops, the extent of market declines and investor reactions will likely play a crucial role in determining whether Trump will be forced to alter his trade policies.
Image Credits: Photo by Nick Chong on Unsplash
