High-Level Tariff War Fueling Extreme Volatility

Friday’s session, which saw the Dow drop 2,200 points, felt like capitulation in that defensive stocks that were seeing bullish rotation were sold off aggressively. And then, today’s session proved that the extreme volatility was anything but done. Rumors of trade deals and delays for implementing tariffs sparked a 2,596-point swing in the Dow, from its opening low to a massive midday 900-point rally that fizzled when the rumors of a 90-day waiting period were debunked by the White House as fake news.

Shares of utilities, consumer staples, gold, telecommunications, insurance providers and, to some extent, health care REITs all succumbed to the cascade of indiscriminate selling pressure by investors looking to raise cash going into the weekend. When defensive stocks start selling off aggressively, it can signal different things depending on the broader market context.

Market bottoms are notoriously difficult to time, but watching investor sentiment, economic indicators and earnings trends can provide clues. Investor sentiment is in the tank, economic indicators are stable, inflation ticked higher and earnings are on deck. In the S&P 500, 68 out of 107 companies that provided earnings guidance for the first quarter have issued negative earnings-per-share (EPS) guidance, above both the 5-year and 10-year averages.

Sources: Standard & Poor’s, Bloomberg Finance L.P., Fidelity Investments.

The swiftness with which the major indexes declined to where investors gave up on most defensive stocks on Friday, following several weeks of steady selling, raised the question of whether a tradable bottom is in or there is more downside ahead. One can look at this scenario in two separate ways:

Potential Market Bottom: If defensive stocks are being sold alongside everything else, it could indicate capitulation — when investors panic and sell indiscriminately. This often happens near market bottoms, as fear peaks and liquidity dries up. Historically, broad-based selling, including defensive stocks, has sometimes preceded a rebound.

Further Correction Ahead: On the other hand, if defensive stocks are selling off while growth and cyclical stocks are already down, it might suggest investors are shifting out of safety and into cash, fearing deeper declines. This could indicate that the correction is still unfolding and that investors expect more pain ahead.

This week will usher in first-quarter earnings season featuring results from the money center banks on Friday. This will be the first true market tell as to the state of businesses and consumers. For the next two weeks, the schedule of companies reporting is available below for those who want to have a calendar by which to track how the Q1 numbers are coming in. At this point, the bar is extremely low given the substantial declines in share prices that have now hit all 11 market sectors.

Source: www.briefing.com.

For the market to stabilize and attract buyers back in, one can assume that companies will have to address what level of impact tariffs will have on their businesses. To not come forward with tariff-related guidance will invite further uncertainty and probably further selling pressure. CEOs and their teams will have had time to crunch the scenarios that are specific to their businesses.

The level of uncertainty is sky-high, and hopefully, earnings season will be the bearer of a level of clarity that sends a message that tariffs are priced in following this 18% correction for the S&P 500 — from its peak of 6,147 on Feb. 19 to Friday’s close of 5,704. Trading volume for last Thursday and Friday was through the roof, typically a sign of real panic. The CBOE Volatility Index (VIX) exploded higher, closing at 61.13 in today’s wild trading session.

Source: www.bigcharts.com.

This kind of reaction has historically been the stuff of market bottoms. Fingers crossed that history repeats itself and earnings season is the salve that soothes and heals a wounded bull. The one other, and maybe more important catalyst, would be some real give-and-take on tariffs — meaning agreements to radically lower tariffs. Or, as Elon Musk has proposed per the United States and EU, drop them to zero on both sides and let free trade determine winners and losers.

In theory, free trade is meant to eliminate tariffs and other trade barriers, allowing goods and services to move across borders without additional costs imposed by governments. However, in practice, free trade agreements (FTAs) can still include some tariffs, especially during transitional periods or for sensitive industries. Some FTAs gradually phase out tariffs over time rather than eliminating them immediately. Certain industries, like agriculture or manufacturing, may have exceptions or protections built into agreements. If a country violates trade rules (like dumping products below cost), retaliatory tariffs can still be imposed even within a free trade framework.

So, while free trade aims to minimize tariffs, real-world trade policies are often more nuanced. The main thing is to see the trend reverse course and start moving toward free trade being phased in, which would stop the bleeding and propel stocks higher.