Tariffs Trigger Worst Session Since 2020

The Dow Jones Industrial Average^® ($DJI) fell 1,679.39 points (–3.98%) to 40,545.93; the SPX fell 274.45 points (–4.84%) to 5,396.52, and the Nasdaq Composite^® ($COMP) dropped 1,050.44 points (–5.97%) to 16,550.60.

The SPX is down more than 10% since the final session before the inauguration and off 12.1% from the February 19 all-time closing high of 6,144. The SPX closed today back at levels last seen in mid-August, and settled near its session lows. The $COMP is down more than 17% from its December peak and nearing bear market territory. There wasn't much "buy the dip" as stocks descended.

Trump's executive order implemented a minimum 10% tariff on all imports taking effect April 5 and additional individualized reciprocal tariffs on imports from 60 countries that in some cases will exceed 50%. While the order provided clarity about the shape and size of tariffs, the policy was harsher than expected and didn't answer all questions.

"Although there is some level of revelation regarding the rates across various countries, there remains a level of uncertainty around whether negotiations will be entertained, whether there will be any retaliations from countries outside the U.S., how long the announced rates will remain in place, and what the potential impact will be to global demand and economies," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.

The White House said negotiations won't be entertained, and China promised to retaliate if tariffs aren't revoked immediately.

"A key question is to what degree the new tariffs are a negotiating tactic, designed to encourage countries to work out better trade terms with the United States," said Michael Townsend, managing director, legislative and regulatory affairs at Schwab. "The executive order signed by Trump specifically gives him the ability to reduce tariffs if a country negotiates or takes other steps to reduce its trade barriers. That may mean that the April 2 announcement represents 'peak tariffs,' with subsequent announcements likely to be directionally downward as countries begin negotiations and make concessions."

The S&P Technology Select Sector Index (IXT) plunged and the small-cap Russell 2000^® Index (RUT), entered a "bear market," down 20% from its last high. Technology firms have complex supply chains in Asia, a continent targeted with the highest Trump tariffs.

Apple (AAPL) is an example, and it had its worst day since March 2020, falling around 9%. The company would be hard pressed to move iPhone production to the United States. Taiwan Semiconductor Manufacturing (TSM), a company Trump indirectly referred to yesterday when he said semiconductors are mostly manufactured in Taiwan, fell nearly 7%.

Typically, tariffs help small companies because they sell and make more of their products domestically, but concerns that the economy could enter recession and hurt spending appeared to outweigh any trade benefit. The RUT now trades back where it did in December 2020.

From a technical perspective, the Relative Strength Index (RSI) for the SPX is still 32. Oversold territory is generally seen as 30 or below. And the Cboe Volatility Index^® (VIX) is still below its recent high of nearly 30 reached in December and March.

"VIX is relatively contained, in my view," said Schwab's Peterson. "The term structure is in backwardation, so it appears that expectations are for volatility to remain elevated over the next couple of trading days as stocks 're-price,' but then for some relative stabilization to occur." Backwardation means the spot price is higher than future prices, a sign that the market believes volatility will ease.

Consumer staples were the only U.S. sector to show much positive traction today. Investors piled into perceived "safe havens" like the Japanese yen and U.S. Treasuries, and investors "still view U.S. Treasuries as a reliable port amid the storm," said Kathy Jones, chief fixed income strategist at Schwab.

Somewhat surprisingly, energy turned out to be the hardest-hit sector today, though it was dealing with news unrelated to tariffs as OPEC and its allies sped up its production hike to more than 400,000 barrels a day to begin in May. Crude oil (/CL) fell nearly 7% to two-week lows below $67 a barrel. The long-term low below $64 was posted nearly two years ago and a drop under that might signal worries of even more economic weakness.

Schwab Chief Global Investment Strategist Jeffrey Kleintop said that "global markets could remain volatile in the near term," but noted that "while there are no winners in a trade war, international markets may fare better—especially in Europe—where rising economic and monetary stimulus can help support domestic growth."

The CME FedWatch tool puts odds of a May rate cut at around 21%, up from around 11% yesterday before the tariff news but still relatively low. Farther ahead, the futures market builds in strong chances of three to four Fed cuts this year. Odds now exceed 50% of four cuts or more. Fed Chairman Jerome Powell is scheduled to speak at 11:25 a.m. ET tomorrow on the economic outlook.

Before Powell talks, the March nonfarm payrolls report is due at 8:30 a.m. tomorrow, with expectations for around 130,000 new jobs and steady unemployment at 4.1%. However, today's March Challenger layoffs data spiked to nearly five-year highs, reflecting major cuts in federal government jobs. ISM Services PMI^® data today hit nine-month lows.

If companies see their margins squeezed and come under pressure to grow earnings or at least keep them steady amid tariff uncertainty, layoffs could ensue. The "average hours worked" metric of the nonfarm payrolls report might offer clues on how fast layoffs could happen. It's been down over the last year, and if it slips more it might suggest companies have leeway to cut jobs. Rising unemployment typically precedes recessions.

Firms might also cut their earnings guidance for 2025, making stock valuations look high even with the market down double-digits. Analysts now expect 11.5% earnings per share growth for S&P 500 firms this year, down from 14.2% on December 31, according to FactSet. It's very likely that figure will continue to drop. Firms will be under pressure not to issue guidance they can't meet and might be ultra-conservative or provide no guidance at all. That dampens hopes for an earnings season rally.

On the move

• The 10-year Treasury note yield (TNX:CGI) dropped 14 basis points to 4.06%, ending above its lows for the day just above 4% and the weakest since October. Investors piled into Treasuries—which move opposite of yields—in a move toward perceived safety.
• Tesla (TSLA) fell more than 5%, partly on tariffs but also as investors continued to react to disappointing first quarter delivery data.
• Coca Cola (KO) rose more than 2% and PepsiCo (PEP) climbed more than 1%, highlighting an investor move toward consumer staples stocks that sometimes perform better in recessions. Other staples stocks on the rise today included Procter & Gamble (PG), Clorox (CLX), Kroger (KR), and Campbell's (CPB).
• Health care firms Johnson & Johnson (JNJ), Amgen (AMGN), and Humana (HUM) managed to close steady to slightly higher despite fears that tariffs could make business tough for pharmaceutical firms with complex supply chains around the world. Health care is sometimes seen as defensive because people still get sick even during recessions.
• Shares of crypto-associated names MicroStrategy (down nearly 10%) and Coinbase (down nearly 7%) cratered Thursday as risk appetite withdrew from the market. Bitcoin (/BTC) fell less, down about 5%, and managed to remain above technical support at its 200-day moving average just below $80,000.
• Target (TGT) fell nearly 11%, hurt like other retailers by tariffs that could affect its overseas supply chains. However, Target arguably did worse than some competitors like Walmart (WMT), which only fell 2.8%. This could partly reflect other news, including a report by Fortune that foot traffic fell 5.7% year over year for Target and is down eight straight weeks due to a customer boycott. Best Buy (BBY) dropped 18%, leading losses among a number of big box stores.
• Ralph Lauren (RL) dropped 16%, making it one of the worst performers on the consumer products side today. Retailers with supply chains and manufacturing in Vietnam were hardest hit, and Ralph Lauren has facilities in Vietnam. It reduced its footprint in China, a country Trump targeted in his first term.
• Apple fell more than 9% for its worst day since the pandemic month of March 2020, losing around $300 billion in market value. It makes its iPhones in countries among the most targeted by tariffs.
• Financial stocks took it on the chin Thursday amid falling Treasury yields that could clip their profit margins and fears a recession could reduce demand for their services. The KBW Nasdaq Bank Index (BKX) dropped nearly 10% today.
• Nvidia (NVDA), already under pressure much of the year amid worries about AI demand and U.S. trade barriers against China, dropped 7.8% and hit the lowest level since last August intraday.
• Nike (NKE), which has supply chains across Asia, fell 14.4% today. Other footwear stocks also got blistered. Nike shares fell below their pandemic-era lows and traded at their weakest level since late 2017. The stock is down 69% from its late 2021 peak.
• United Airlines (UAL) descended 15% and Delta Air Lines (DAL) fell 10%. The airline sector was already skidding after several major companies cut guidance last month amid declining demand. Worries that travelers might boycott the U.S. are now hurting these stocks, as well. So is fear of a recession.

More insights from Schwab

Volatility considerations: If you're worried about the current choppiness, you're almost certainly not alone. Turbulent market conditions can make anyone nervous, so here's some of Schwab's expert perspective on things investors might want to consider at such times, including resisting the urge to sell and taking the long-term view.

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