S&P 500 Faces 9% Drop as Trade War, Fed Inaction Fuel Sell-Off

Michael Hartnett, the Chief Investment Strategist at Bank of America, has advised investors to sell any rebound in the S&P 500 index until the Federal Reserve intervenes and the U.S.-China trade tensions ease. Hartnett's comments come as the market grapples with the fallout from President Trump's tariff policies, which have sparked significant volatility and uncertainty.

Hartnett believes that Trump's tariff policies and the resulting market turbulence are transforming the "American exceptionalism" narrative into a "negative America" sentiment. He recommends maintaining a short position in stocks until the S&P 500 drops to 4800 points, while also suggesting a long position in two-year U.S. Treasury bonds. In a report, Hartnett noted that rising bond yields, a falling stock market, and a weakening dollar are triggering a global sell-off in assets, which may prompt policymakers to take action. However, he advises investors to reduce their holdings of risky assets at this stage.

The S&P 500 index has fallen more than 10% this year due to the impact of Trump's fluctuating tariff policies. Last week, after the U.S. government announced comprehensive tariff increases, global stock markets plummeted, and concerns about an economic recession surged. This week, Trump announced a 90-day suspension of some tariffs, but after China announced retaliatory measures, the U.S. responded by increasing tariffs on Chinese goods to 145%. On Friday, China announced it would raise tariffs on U.S. goods to 125% in response.

The news of the tariff suspension briefly drove the S&P 500 to its largest single-day gain since 2008, but the index resumed its downward trend on Thursday, indicating a lack of market confidence in the rebound. Hartnett stated that unless the Federal Reserve significantly cuts interest rates to halt the asset sell-off and the U.S. and China pause their trade war, he will continue to maintain a short position. He suggested that if policy panic results in a short-term, shallow recession, investors could buy the dip when the S&P 500 reaches around 4800 points, a 9% drop from Thursday's close. However, he noted that many investors strongly oppose this view, as they expect earnings downgrades to drive the index down to 4000 points.