The Stock Market Got What It Wanted From Trump. Why It’s Finishing the Week Lower.

The stock market’s rollercoaster ride in Q2 2025 began with a historic crash triggered by President Trump’s “Liberation Day” tariff announcements on April 2. Investors initially cheered a 90-day reprieve on non-China tariffs, but lingering uncertainty, unresolved trade tensions, and structural economic risks have kept markets in the red. This week’s decline underscores a deeper truth: even temporary policy wins cannot offset the systemic damage of protectionism and fiscal recklessness.

The Volatility Event: Tariffs, Retaliation, and the Two-Day Crash

On April 2, Trump’s unilateral tariffs—10% on all imports, with rates as high as 245% on China and 20% on the EU—sent markets into freefall. . The S&P 500 lost 10% from its peak, the Nasdaq entered bear market territory (-11%), and the Dow Jones dropped 9.48% over two days, erasing $6.6 trillion globally.

The panic deepened as China retaliated with a 34% tariff on U.S. goods, while oil prices collapsed to $58.95/barrel—a 2021 low—and the VIX fear gauge spiked to 45.31, its highest since the 2020 pandemic.

A partial reprieve came on April 9 when Trump announced a 90-day pause on tariffs—excluding China. The S&P 500 rallied +3.5%, but the exclusion of China and ongoing uncertainty about permanent tariff rates left markets fragile.

Why the Market Remains Lower: Three Lingering Headwinds

1. The China Tariff Conundrum

The exclusion of China from the pause ensured that $550 billion in bilateral trade remained under threat. While U.S. tariffs on China averaged 125%, Beijing’s retaliatory measures and supply chain shifts (e.g., sourcing semiconductors from Taiwan) have reduced U.S. net exports by -4.8% in Q1, the largest GDP drag in history.

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2. Fiscal Deficits and Inflation Fears

The U.S. deficit stood at $1.8 trillion (6.4% of GDP) in 2024, with no credible path to the administration’s 3% target. Proposed tax cuts and infrastructure spending could add $5.8 trillion to deficits over 10 years—a scale exceeding the 2017 Tax Cuts and 2021 American Rescue Plan combined.

This uncertainty has pressured bond markets: the 10-year Treasury yield surged 50 basis points in a single week in April, settling at a 12-basis-point monthly gain.

3. Currency Risks and Global Underperformance

The U.S. dollar declined -4.6% in April 2025, its worst month since 2022, as capital flows shifted to non-U.S. markets. The STOXX Europe 600 rose +11.2% (vs. the S&P 500’s -6.8% decline), while gold surged +20.4% as a safe haven.

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The Path Forward: Diversification and Defensive Plays

Investors must confront two realities:
1. Trade wars are here to stay. Tariffs may settle between 10–20%, but substitution effects (e.g., supply chains leaving China) and inflation (projected at 5% over 12 months) will linger.
2. U.S. markets are no longer the global leader. A “60/40” global portfolio (30% Europe, 30% Japan, 40% bonds) offers 36% less volatility than a U.S.-only allocation.

Key Strategies:

• Global Equity Exposure: Overweight Europe and Japan. The euro’s strength and Japan’s corporate reforms make them attractive.
• Short-Term Treasuries: Favor 5-year bonds (average yield of 4.2%) over long-dated debt to avoid deficit-driven yield spikes.
• Structured Notes: These instruments provide downside protection while offering equity upside, critical in volatile markets.

Conclusion: The Cost of Policy Uncertainty

The market’s decline this week reflects a stark truth: even with temporary tariff pauses, the structural risks of Trump’s policies—trade wars, fiscal deficits, and inflation—remain unresolved. The S&P 500’s -6.8% year-to-date performance contrasts sharply with global peers, while the VIX’s 55+ spike highlights investor anxiety.

Investors must prioritize diversification and liquidity. Until trade tensions ease and fiscal discipline emerges, the U.S. market will remain vulnerable. As one analyst noted, “Ex-U.S. allocations aren’t just a strategy—they’re a necessity.”

The final word? Markets have gotten what they wanted—partial tariff relief—but the underlying storm shows no signs of abating.