Relief Rally Fizzles Out as Traders Grapple with Trump’s U-Turns

The stock market’s brief euphoria after President Trump’s April 2025 tariff reversal quickly evaporated, leaving investors scrambling to decode the administration’s erratic policy shifts. What began as a 9.5% surge in the S&P 500—the largest single-day gain since 2008—turned into a 11.2% decline from its February peak by mid-May. This volatility underscores a critical truth: the market’s fate now hinges not on tariffs themselves, but on the unpredictable flip-flops of U.S. trade policy.

The Tariff U-Turn: From Chaos to More Chaos

Trump’s April 2 “Liberation Day” tariffs—initially set at 10% on all imports and up to 50% for 57 countries—triggered a global sell-off. By April 9, the president suspended tariffs on most nations for 90 days while hiking China’s rate to 125%. This U-turn briefly calmed markets but failed to address the core issue: policy whiplash.

The Penn Wharton Budget Model (PWBM) estimates that even with the pause, long-term GDP could shrink by 6%, with households facing lifetime income losses of $22,000. The sudden shifts have also fractured investor confidence. The Economic Policy Uncertainty (EPU) Index—a gauge of policy instability—surged to 240 in April, its highest since the 2008 crisis.

Sectors in the Crossfire

1. Automotive:
2. Tariffs on Canadian and Mexican imports forced Stellantis to lay off 900 workers. The First Trust NASDAQ Global Auto Index Fund (CARZ) dropped 18% in April.

4. Defense:

5. A rare bright spot, with the iShares U.S. Aerospace & Defense ETF (ITA) rising 14% as military spending surged.

7. Agriculture:

8. Retaliatory tariffs from China and the EU hit U.S. exports. The VanEck Vectors Agribusiness ETF (MOO) fell 22% amid collapsing demand.

9. Consumer Discretionary:

10. Rising import costs pressured retailers. The Consumer Discretionary Select Sector SPDR Fund (XLY) dropped 15% as companies like Walmart warned of price hikes.

The Geopolitical Fallout

Trump’s “reciprocity” strategy backfired spectacularly. China retaliated with 84% tariffs on U.S. goods, while the EU imposed 25% levies on corn and glass. The World Trade Organization (WTO) now warns of a 7% global GDP contraction if trade wars escalate—a stark contrast to the IMF’s 2024 forecast of 2.8% global growth.

Why the Rally Failed

The market’s brief rebound was short-lived because:
- Uncertainty persists: The 90-day tariff pause offers no clarity on post-June policies.
- Structural damage: The Penn Wharton model shows capital investment will drop 4.4% in 2025 due to policy doubt.
- Inflation spikes: Bond yields surged to 4.4%, reflecting fears of stagflation. Oil prices plummeted to $56/barrel—a four-year low—before rebounding modestly.

What Investors Should Do Now

1. Avoid U.S. Equity Exposure:

2. The S&P 500’s 11.2% drop from its peak signals further downside unless policies stabilize.

3. Hedge with Defensive Assets:

4. Gold: A classic safe haven, up 8% in April.

5. U.S. Treasuries: Despite rising yields, demand for stability could keep 10-year bonds above $120.

6. Target Sectors with Policy Resilience:

7. Defense: The ITA ETF remains a rare beneficiary of militarized trade.
8. Renewables: While fossil fuels suffer, solar and wind companies face fewer tariff threats.

Conclusion: The Cost of Chaos

Trump’s policy reversals have created a lose-lose scenario. Even if tariffs are scaled back, the 6% GDP hit projected by PWBM and the $22,000 lifetime loss per household reveal the true cost of economic uncertainty. With the S&P 500 down 11% from its peak and the EPU Index near crisis levels, investors must prepare for prolonged volatility. The lesson? In a world of policy whiplash, only the agile—and the lucky—will survive.

Final Analysis: The market’s brief rally was a false dawn. Until Trump’s U-turns stop, portfolios should prioritize stability over growth—and brace for more turbulence ahead.