Trump Presses the Pause Button and Buyers Scramble to Press Play
The giant gains Wednesday illustrate that almost no one was prepared for this news. But can the market build on it?
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President Trump shocked the market when he announced a 90-day pause in tariffs on all countries that were negotiating in good faith. China was excluded, and its tariffs were raised to 150%. There will be a universal 10% tariff while negotiations are ongoing.
The news hit at an ideal time as the doom and gloom was hitting extreme levels. Goldman Sachs GS had just increased its odds of a recession, and the bond market was showing signs of extreme stress. Trump admitted to watching the bond market on Tuesday night and was concerned about the action.
The news drove the DJIA to its biggest point gain in history, 2932 points, surpassing the previous record of 2113 set on March 24, 2020, when a massive stimulus program was announced in response to Covid-19. The S&P 500 soared 9.4%, and the Magnificent Seven pool vaulted to a gain of 14.5%. It was a frenzy of buying as the worries about the economic impact of a trade war evaporated.
The decision to provide relief to all countries other than China also helped to put the U.S. in an even stronger negotiating position with the country that is its biggest trade villain. The pressure on China will be tremendous as the entire world will now be united against it.
While there is great relief, the very elevated levels of volatility are likely to continue. It will take months to negotiate trade deals, and there are very likely to be negative surprises along the way.
The most important immediate question is whether the market can build on this action. The giant gains illustrate that almost no one was prepared for this news. Shorts were forced to cover, and underinvested longs had to scramble to add exposure. A move like this creates very high levels of FOMO and produces a supply of dip buyers that will provide technical support. Trying to put more cash to work without chasing is extremely difficult.
A trade war with China still has the potential for negative ramifications, but it is far better than a trade war with the entire world. It will be interesting to see how economists and pundits modify the predictions of a recession.
Have a good evening. I’ll see you Thursday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
