This Will NEVER Happen in History

The US Trade Policy Uncertainty Index is currently over ~25% higher than the peak of the Trump trade war 1.0. The S&P 500 has fallen -10.5% in 6 weeks and is in a correction zone, wiping out -3 TRILLION DOLLARS in 4 trading days.

On February 19, the S&P 500 reached a new record high of 6147. The sell-off accelerated in March when President Trump declared he was "not watching the market." On March 13, a slight recovery led to the announcement of a 25% car tax last week. Today, we are back with another round of adjustments.

The market is pricing in a few key headlines from President Trump this weekend. On Sunday, around 11 a.m. Eastern time, President Trump threatened to "bomb" Iran. He also threatened to impose a 25%-50% tax on Russian oil. Later, Trump said he "doesn't care" if automakers raise car prices.

A few hours later, the WSJ reported that Trump is considering "broader and higher tariffs" ahead of April 2. President Trump is considering a "comprehensive tax increase of up to 20%." Then, President Trump stated that tariffs would start with "all countries" this week and "see what happens."

The economic policy is currently at the most uncertain point in recent history. The 5-day moving average of the U.S. economic uncertainty index reached ~634 in March. This figure is HIGHER than ~270 points compared to the peak in 2008 and higher than the peak during the pandemic in April 2020. The instability is driving the fall today.

So, what will happen next? According to estimates by Barclays, President Trump will impose new tariffs on more than 25 countries on Wednesday. We believe that most of these have been PRICED IN, especially with the recent fall in investor sentiment. The stock market sentiment has collapsed.

However, we believe that the market is also underestimating the impact of reciprocal tariffs on Trump's reciprocal tariffs. We expect to see new tariffs from the EU and Mexico as early as April 3. We believe this will impact approximately $1.3 trillion in trade, potentially causing a fall in GDP of more than 100 basis points. Below is a nice summary of the imposed and threatened tariff levels: The looming tariff threats against the EU will affect the massive import volume of ~600 BILLION DOLLARS. These tariffs alone could cause a fall in the GDP of the United States by about 70 bps and add about 40 bps to inflation. We believe that the stagnation has begun.

Goldman's stock basket is thriving in the "stagflation scenario" that is surging, as illustrated below. As a result, the Fed's situation is even WORSE. Higher interest rates will push us into recession while lower interest rates will rely on increasing inflation. Now is a situation where both sides lose.

This chart summarizes the current situation of American consumers: Inflation predictions are at their highest level since 1993 while consumer confidence has fallen sharply. Consumers CANNOT get through another recovery inflation phase and they believe that we are in a recession.

If you are looking for a bottom, then stop. As you can see below, the Volatility Index, $VIX, has not yet shown any clear signs of capitulation. In fact, the initial fall wave and the subsequent drop of this bull trap generally occur in sequence. We have not yet seen real panic.

Furthermore, keep following the Magnificent 7 stocks. Although they have fallen sharply, they still represent about 31% of the S&P 500, down from 35% at the peak. Magnificent 7 is FALLING BACK on both US and European stocks for the first time in many years. This cannot happen in a bull market.

Finally, while the S&P 500 has only fallen -6% YTD, market sentiment feels as though we have fallen more than 20%. Why is that? Because most large-cap technology stocks are falling over 20%.