Wild swings lashed Wall Street for a fourth straight session as back-and-forth trade threats between the US and China knocked down stocks, erasing an earlier rally that was the biggest since 2022. The S&P 500 fell almost 3%, leaving it on the brink of a bear market.
Hopes for a quick end to extreme volatility were dashed after a White House official said the US is moving forward with tariffs on China as high as 104%. Equities extended losses as Chinese Premier Li Qiang said his country has ample policy tools to “fully offset” negative external shocks. Treasury two-year yields tumbled as traders boosted bets on rate cuts.
Tuesday’s slide extended the S&P 500’s more than 10% drop since the president detailed worldwide levies he says are crucial to restoring American prosperity.
“The volatility reflects the new situation in which no one knows what the rules of road are, or even what the desired destination is,” said Que Nguyen at Research Affiliates LLC. “Until investors reset expectations or those rules and goals are better understood, markets will continue these wild swings between hope and fear.”
Trump spent the final hours before his sweeping tariffs were set for full implementation lining up talks with key US allies, but hopes for a last-minute agreement with China appeared distant.
Across world markets, investors have been gripped by fears that something may break in the financial plumbing amid the cross-asset volatility, spurring speculation the Federal Reserve would need to speed up rate cuts to prevent a recession even with inflation jitters running rampant.
Fed Bank of San Francisco Mary Daly said the US central bank can take its time before making any adjustments to interest rates as it waits to see how trade policy changes play out. Her Chicago counterpart Austan Goolsbee said tariffs are “way bigger” than he anticipated.
“The fundamental reason for the drawdown has been policy uncertainty - it’s functionally impossible to put in a bottom until that fundamental reason has been resolved, or at least until there is directional clarity on it,” said Scott Ladner at Horizon Investments.
The stock market is particularly vulnerable to wild swings due to a combination of thin liquidity and headline-driven algorithmic trading. According to Goldman Sachs Group Inc.’s trading desk, the gap between market volume and liquidity in S&P 500 futures is currently the widest in the bank’s data set.
“This is what happens in highly volatile markets — they overshoot in both directions,” said Steve Sosnick, chief strategist at Interactive Brokers. “The selling gets overdone, but so does the knee-jerk reaction to buy and chase.”
As Trump’s trade war sent markets into a tailspin, Bank of America Corp. clients posted their fourth-biggest inflow into US equities on record last week: $8 billion.
Institutional clients, retail traders and hedge funds were all net buyers, strategist Jill Carey Hall wrote in a Tuesday research note.
Meantime, warnings from Wall Street strategists keep piling up on the dour outlook for stocks.
BlackRock Inc. strategists Jean Boivin and Wei Li downgraded US equities on Monday to neutral from overweight on a three-month horizon, saying they expect “more pressure on risk assets in the near term given the major escalation in global trade tensions.”
And a strategy team at Goldman Sachs Group Inc., including Peter Oppenheimer and Lilia Peytavin, said the equity selloff could well turn into a longer-lasting cyclical bear market as recession risks mount.
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