How Trump’s tariffs rollout turned into stock market mayhem

Before Wednesday, President Donald Trump’s tariffs were expected to be a problem for markets and the economy, but a manageable one.

So much for that idea.

What happened instead is something worse than the worst-case scenario, which previously had been one where the U.S. would slap true “reciprocal” duties on its trading partners that would match tariffs charged to American exports.

In a perfect world, that would have triggered a round of negotiations that led to deals all sides could live with as part of a Trump effort to change the trajectory of global trade, reshore American jobs and transform the U.S. from being dependent on cheap foreign imports and lavish government spending to a production-focused economy.

Fears around that scenario were focused on a spark to inflation and perhaps a slight slowdown in growth.

What actually emerged, though, has been economic, market and geopolitical mayhem.

It started with Trump’s Rose Garden news conference Wednesday after the market close, when the president recited, almost gleefully, his intentions to “pry open foreign markets and break down foreign trade barriers.”

The plan: Slap 10% tariffs on every U.S. trading partner starting Saturday, with individualized rates for 60 other countries that would begin in a week. Virtually overnight, the effective U.S. tariff rate was set to spring from 2.5% to well past 20%.

For perspective, that has the potential to be the highest level since 1910 — higher even than the devastating Smoot-Hawley tariffs of 1930 that many economists see as contributing to the Great Depression, putting an exclamation point on Trump’s anti-globalist, maximalist protectionism that went beyond Wall Street’s worst fears.

Quick reaction

If Trump was playing chicken with the rest of the world, he lost round one.

China retaliated with 34% tariffs on all goods, European Union leaders also are considering countermeasures, and the suddenly antagonistic relationship with Canada and Mexico will have to be smoothed over during United States-Mexico-Canada Agreement talks in coming months.

Markets recoiled at the developments, sending stocks into a vicious two-day sell-off that put the Nasdaq Composite, home to powerhouse Silicon Valley names that Trump has been courting in the early days of his second term, into a bear market.

Economists, meanwhile, were aghast at the rudimentary math that went into calculating the tariffs. Essentially, the administration, in a plan the Washington Post reported was being cooked up until three hours before the announcement, simply divided the trade deficit with individual countries by the total value of U.S. exports to devise “reciprocal” tariffs that don’t appear to live up to their billing.

According to the Center for Strategic and International Studies, the formula “punishes high-deficit trading partners from which the United States imports a lot and buys little from, not necessarily those with the most restrictive trade regimes.”

“In short, the formula provides rough justice at best, blunt force at worst,” the center said in an analysis.

A market beatdown

Investors responded by selling everything except bonds. After all, how can anyone know what the proper price to pay for future earnings is when it’s now virtually impossible to figure out future earnings?

Under the best-case scenario for Trump, other countries will come to the table and lower tariffs, opening up markets for U.S. goods and allowing the U.S. access to their markets. Even then, though, it will require a huge retooling of an economy that in 2024 owed 68% of activity to consumer spending and had a trade deficit of $903 billion.

To be sure, there were some early negotiations.

Trump boasted Friday on Truth Social that he had “very productive call” with Vietnamese Communist Party leader To Lam, who allegedly agreed to cut tariffs to zero if a deal could be struck with the U.S. In addition, Trump disclosed further interest in making a deal with China on TikTok, a potential linchpin in allaying escalating tensions between the two sides.

“ONLY THE WEAK WILL FAIL!” Trump proclaimed Friday afternoon on Truth Social.

While the stock market certainly didn’t fail during the week, it did surrender some $6 trillion in value as the Dow Jones Industrial Average hemorrhaged more than 3,900 points in a two-day span, something it’s never done before.

Investors looking for the Federal Reserve to ride to the rescue were left wanting Friday when Chair Jerome Powell indicated the tougher-than-expected tariffs would dent growth and, more importantly, boost inflation. Powell professed the central bank would stay in its holding pattern on interest rates, dashing hopes for now of a “Fed put” to put a floor under the market carnage.

“I think this is the biggest policy mistake in 95 years,” Wharton School professor Jeremy Siegel said Friday on CNBC. “This is a self-inflicted wound. It’s an unforced error – did not have to happen.”

Still, numbers crunchers at the Stock Traders Almanac don’t see a full-fledged bear market coming, noting that corrections like the current one only morph into bears one-third of the time.

But that depends on a president who has been recalcitrant in his current position, vowing Friday that his “policies will never change.”

Such resolute purpose may play to Trump’s supporters, but it’s also what is most scaring the market right now.

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