“Liberation Day” Market Rout

“Liberation Day” Market Rout

“If goods can’t cross borders, armies will.” 

- Cordell Hull, U.S. Secretary of State from 1933 to 1944
 

The past week has been a rollercoaster for financial markets, driven by President Trump’s “Liberation Day” tariff announcement on April 2, 2025. This unprecedented move introduced a 10% baseline tariff on all U.S. imports, with significantly higher tariff rates targeting a broad spectrum of countries. Global markets have reacted sharply, with the S&P 500 dropping nearly 6% by week’s end and the Nasdaq sliding into bear market territory, down over 20% from its recent peak.[i] Volatility spiked as investors grappled with the uncertainty of Trump’s plan, which aims to boost U.S. manufacturing but risks igniting a global trade war. In this update, I’ll break down what’s happened, why the market is uneasy, and what it could mean for your portfolios.
 

Trump’s tariff strategy is bold and centers on China as the primary target. The 34% levy on Chinese imports (effectively 54% with existing tariffs) is designed to pressure Beijing into reducing it’s trade surplus with the U.S. and to encourage companies to relocate production stateside. (the ongoing back and forth changes hourly and may be different by the time you read this).[ii] For example, Trump has pointed to tech giants like Apple, which rely heavily on Chinese manufacturing, as firms that could benefit from reshoring. However, the market isn’t buying the rosy outlook. Stocks like Apple and Nvidia fell 7-8% last week as investors worried about higher costs, disrupted supply chains, and weaker global demand. The fear is that these tariffs, rather than sparking a manufacturing renaissance, could shrink corporate profits and slow economic growth, a scenario Wall Street hates.
 

A key piece of Trump’s plan seems to hinge on lowering interest rates to offset tariff-driven inflation and stimulate the economy. By crashing markets and pushing investors into safe-haven U.S. Treasuries, he may be betting that the Federal Reserve will cut rates to stabilize things. But here’s the catch: China retaliated with its own 34% tariff on U.S. goods and reportedly sold $50 billion in Treasuries last week. If China keeps dumping U.S. debt, it could flood the market with supply, driving yields up (and prices down), counteracting Trump’s goal. 
 

On the chart below, the red line shows the S&P 500 and the blue line shows the 10 year treasury yield. The yields briefly dropped when the market started dropping but reversed course back to where they started without the subsequent rally in markets. Someone is selling US Treasuries and a good guess would be China. 

 

Another component of Trump’s strategy is that by engaging in chaotic foreign policy with unprecedented tariff declarations, the resulting market turmoil will increase the odds of a Federal Reserve rate cut. Goldman Sachs now predicts 130 basis points of easing by year-end 2025 but the betting markets say no change during the upcoming meeting in May.