When US president Donald Trump detonated a trade bomb on 2nd April, with levies set to bite from 9th April, global markets shuddered. Stocks tumbled for four days as investors braced for chaos. Yet, days later, president Trump paused the tariffs for 90 days on all—excluding China—and exempted electronics, triggering a relief rally.
Interestingly, that ‘relief rally’ has now morphed into a full-fledged bull market in some countries. The German market has hit a lifetime high. Even though the US is supposedly facing the prospect of empty shelves in a few weeks, the S&P500 has recorded nine consecutive days of positive closing, its longest winning streak in 20 years! On Friday, it closed at 5,686—above its pre-tariff level. The Indian market brushed off the drama, climbing 3.5% in April.
The exuberance is perplexing. Tariffs, after all, are taxes by another name, inflating the cost of imports. Yale University’s budget lab estimates the 2025 tariffs will lift US consumer prices by 2.3%, costing households US$3,800 annually (in 2024 dollars). Car prices could rise by US$2,000–US$10,000, iPhones by 40% and groceries will not be spared.
The IMF (International Monetary Fund), citing the tariffs, slashed its 2025 US growth forecast from 2.7% to 1.8% and pegged the global recession risk at 60%, up from 40%.
US GDP(gross domestic product) growth may shrink by 0.9 percentage points in 2025, with businesses facing higher input costs, squeezed margins and potential layoffs.
Global supply chains, already fragile, risk further disruption, while retaliatory measures threaten American exporters—farmers and manufacturers in rural heartlands stand to lose most, as they did in the 2019 trade war.
The dire prospects are reflected in the US Consumers’ Expectations Index—based on consumers’ short-term outlook for income, business, and labour market conditions—which dropped 12.5 points to 54.4, the lowest level since October 2011 and well below the threshold of 80 that usually signals a possible recession. In short, there is no upside to president Trump’s tariff tantrums, only a downside—higher consumer prices, slower growth, potential recession, disrupted supply chains, retaliatory trade barriers, market volatility and strained alliances. And yet, investors have been remarkably high-spirited, as if whistling in the park on a sunny spring morning. What gives?
I believe in paying attention to sustained market moves because that is an objective reality, collectively shaped by the wisdom of the crowds. By contrast, narrative is subjective and based on cherry-picked data or incidents.
So, what is the message that the market is sending us?
The obvious initial driver of market gains has been president Trump’s 90-day pause on ‘reciprocal’ tariffs for most countries, excluding China. This sparked a massive market rally, with the S&P 500 soaring 9.5%—its third-best day since 1940—and the NASDAQ jumping 12.2%.
Since then, investors may be calling the president’s bluff. After all, historical precedent from the 2018-19 US-China trade war suggests that markets can recover quickly, once tariff uncertainties subside. Investors now appear to be wagering that this trade war, too, will end in an eleventh-hour compromise.
Curiously, this bet is being placed not by the usual suspects on Wall Street but by retail investors. While institutions have sold off through April, retail investors have been buying the dip—unfazed by tariff headlines. If the market is right, this could mark a rare moment in which mom-and-pop investors outplay the professionals.
Economic data lends some credence to their optimism: April saw 177,000 new jobs and inflation cooled to 2.4% in March, below forecasts of 2.6%.
In India, a weakening dollar against the rupee lured foreign investors back, while domestic funds, now outstripping their foreign counterparts in holdings, kept buying.
A more cynical view may be legal, not economic. President Trump’s second-term agenda is under siege in the courts. Over 200 lawsuits have been filed challenging a range of executive actions, with 70 federal rulings—on issues from immigration to federal spending—thwarting his plans. The Supreme Court has already blocked deportations under the Alien Enemies Act and Mr Trump’s use of the 1977 International Emergency Economic Powers Act to impose tariffs may yet be struck down as illegal.
If the courts agree, many of president Trump’s most disruptive policies may be rolled back or neutered, restoring a semblance of stability. If judicial challenges neuter his policies, it would mean a swing back to 'Biden’s stock market,' implying stability or growth without president Trump’s disruptive policies.
In the end, the market may be messaging less about trade policy and more about president Trump himself. If the president has his way, the current cheerful optimism may turn out to be reckless. But if, as it appears, investors believe the president would be constrained by courts, by Congress, or by his own volatility, then his threats may not matter. Tariffs, in that case, are noise. The signal is elsewhere.
(This article first appeared in Business Standard newspaper)
Comments
suketu
6 days ago
Tariffs are not even starters served by Trump.Much more great action by him coming up .
Policy-makers and pundits in Delhi have been quick to declare the US-China trade war a golden opportunity for India. As supply chains fray and geopolitical tensions deepen, could India finally seize a slice of China’s enormous export...
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