Millions wiped from global stock markets as tariffs spook investors
Continuing on from the fallout of last week's tariff announcement from President Donald Trump that set global leaders, economists and investors on high alert, stock markets have been suffering significant losses. Several stock markets have reached bear market territory - where they slip 20 per cent below a recent peak.
Experts from Bayes Business School have been commenting on what this means in both the short and long-term, as well as what the Trump administration might do to stablilise the US economy while saving face with voters.
Immovable object v irresistible force
Dr Simon Hayley, Senior Lecturer in Finance and former government and marketing policy analyst, said:
“A large market sell-off can see different types of selling.
“The first is purely rational: the outlook for an economy is worse than previously believed so equity prices fall. Secondly, lower prices leave some leveraged investors needing to sell for liquidity reasons. Regardless of what they believe, they need the cash.
“Similarly, the massively increased level of uncertainty means that other investors will decide that even if they believe markets are likely to recover, they simply cannot afford to take the risk. This is visible in the massive rise in the VIX index, as equity option markets now price in greater future volatility. Beyond that, we might see more irrational selling as psychological effects start to dominate.
“At the weekend, hedge fund manager Bill Ackman called for a ‘90-day time-out’ on the US tariff package. Behind closed doors, many others are likely to be doing the same. Politically and economically, this recommendation represents the ‘least bad’ exit strategy for Trump.
“Many economists have pointed out that the rationale behind the tariff package is misguided. Equity markets have spoken louder.
“Trump would not like being seen to change his mind, let alone admit a mistake. If that makes him seem like an immovable object, the scale of the equity market sell-off since his announcement last Wednesday must be seen as an irresistible force and represents a tangible economic wound.
“Millions of US voters will have calculated exactly what they have lost since the announcement, both as a percentage of their savings and in terms of what this means for their life plans.
“Political strategists must be wondering if any presidency can recover from inflicting such pain on voters. A “time out” would be the best way out of this predicament as it would reduce fears of a worsening trade war, and increase the likelihood that the additional tariffs would not be permanent.
“At the end of this period Trump could declare victory, pointing to whatever concessions have been made by trading partners as evidence of his negotiating skill.”
"Bizarrely uncharted waters"
Stephen Thomas, Professor of Finance, said:
‘’The overvalued US stock market was looking for an excuse to drop. Markets hate economic and political uncertainty, and Trump has handed that out in spades.
“The economic fundamentals will suffer a tariff-related rise in risk premium, but this time around it is accompanied by a threat to the democratic foundations of the USA. Nobody can quantify the impact of this on asset prices over the next few years.
“At a guess, equity prices will be at least 25 per cent lower than previously for the duration of the Trump presidency. On top of this, given the informed speculation that shorter-term treasuries may be forcibly swapped for 100-year bonds, we are in bizarrely uncharted waters.
“Cash – and short-term treasuries – are now king, and may well be for several years.’’
Uncertainty on Trump’s next move breeds investor fear
Sonia Falconieri, Professor of Corporate Finance, said:
“Trump’s tariff announcement and the prospect of extended trading wars are increasing the risk of recession and inflation, which makes investors edgy.
“On one hand, markets are trying to figure out what else Trump has in store, and on the other there’s the possibility of further retaliatory measures and the prospects of a trade war that will benefit nobody.
“It is possible Trump will leverage the momentum to secure favourable concessions from the US’s counterparts. Until there is more clarity on how the situation will pan out, though, it is hard to imagine markets making a significant bounce back.”
Stock market drops down to tariff economics and market dynamics
Giovanni Cespa, Professor of Finance, said:
“The market reaction we are seeing can be attributed to the economics of tariffs and the way markets work.
“Tariffs of this magnitude have the power to trigger a recession because they are a tax on the consumers of a country that imposes them. They make it more expensive for exporters of final goods, and importers of intermediate goods, to reach the final consumer. This impacts company profitability which in turn leads to job losses and production cuts.
“The market correction can therefore be understood as a reaction to the anticipated negative effect the tariffs will have on companies' future earnings.
“A broad realignment process tends to clog markets for risky securities, and often calls for some form of intervention from central monetary authorities to jumpstart the system if this is indeed possible.
“The SVB bankruptcy in 2023, for example, occurred because of the bank's mismanaged exposure to interest rate risk, in a period when the US Federal Reserve started raising interest rates to control the burst of a inflation.
“The reason why such events occur is not immediately evident, which sows distrust in the functioning of securities markets. This tends to reduce market participation which magnifies the effect of demand shocks.”
