Stock correction nearly over, despite Trump and his divisive foreign and economic policies
The world is on edge over Donald Trump’s divisive foreign and economic policies, but that doesn’t look like it will stop investors piling into shares.
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As much as it’s hard to be bullish on stocks as the Trump administration pushes through tariff increases, the recent correction is probably finished, subject to a good US non-farm payrolls report.
Provided the data don’t show an early hit from uncertainty over the economic impact of US President Donald Trump’s policies, global stocks should rebound strongly before US CPI data next Wednesday.
Investors should be somewhat relieved by this week’s price action, although caution may linger before US steel and aluminium tariffs planned for March 12 and “reciprocal tariffs” on April 2.
The S&P 500 rose 1.1 per cent on Wednesday after Trump delayed a 25 per cent tariff on cars from Canada and Mexico by one month.
That followed indications this week from US Commerce Secretary Howard Lutnick that concessions were likely. His comments came after the Nasdaq Composite hit “correction” territory on Tuesday.
The rebound in US stocks was helped by a surprisingly strong US ISM Services report, albeit with prices-paid rising and firms struggling to pass on costs.
European stocks soared, with the DAX index up 3.4 per cent on German stimulus plans that could enable more than EUR1 trillion ($1.7 trillion) in defence and infrastructure over the next 10 years.
Despite the barrage of tariff headlines this week, culminating in the start of 25 per cent tariffs on Mexico and Canada and an additional 10 per cent tariff on China on Tuesday, there have been increasing technical signs of a bottom in the US and Australian stock markets in the past two days.
The S&P 500 and Nasdaq 100 indexes bounced off their 200-day moving average support lines after falling as much as 6.7 per cent and 9.7 per cent from their record high daily closes.
The broader Nasdaq Composite soon regained its 200-DMA after a “false break” to the downside.
At that point, it had fallen 11 per cent from its record high close.
Since 1930, the S&P 500 has had pullbacks of 5 per cent or more just 3.3 times a year on average. Pullbacks of at least 10 per cent have occurred only 1.1 times a year.
Clearly, it would be unusual for the S&P 500 to fall much further than it has done this year. Then again, it could be argued that 2025 is destined to be far from usual.
The US economy is slowing, but the Federal Reserve is delaying further interest rate cuts amid worries that tariffs will cause inflation to take off again. Meanwhile, other countries face economic growth risks from US tariffs and possibly some inflation risks if they retaliate to US tariffs.
But in the short term, stock market volatility looks to have peaked, and that’s good news for stock prices.
The VIX index fell 1.5 points to 22.02 per cent after hitting an 11-week high of 26.35 per cent this week. A further retreat below the long-term average of 19.3 per cent on the VIX could allow volatility targeting funds to buy more stocks in coming days.
At the same time, the US dollar index fell below its 200-DMA for the first time in four months as the euro soared, potentially giving a bullish signal to global stocks relative to the US.
However, despite the signs of a bottom in stocks and bond yields this week, Nomura economists said Trump has been willing to escalate trade conflicts despite equity market weakness and volatility.
“While there is some degree of market or real-economy stress that could cause him to back down from tariff threats, his actions to date make us sceptical of a rapid de-escalation,” they said.
“The history of Trump’s first term suggests a relatively high pain tolerance for equity market weakness.
“The simplest and broadest evidence is that Trump chose to escalate the trade war in 2018 – one of the worst non-recessionary years for equity performance in recent decades”.
Nomura economists found little evidence that Trump timed his tariff announcements to manage equity markets.
They noted that while he appeared to back down at times in response to market pressure, this wasn’t a consistent response, and the broader trend through his first term and recent weeks “suggests a willingness to escalate despite market stress.”
“We think it is unlikely that Trump will follow through on all his threatened tariffs and there are already hints of him backing down from yesterday’s 25 per cent tariffs against Canada and Mexico,” they said.
“Trump has indicated a willingness to look through equity market weakness and inflation pressure, though, and his actions in his first term make us sceptical that market pressure will force a quick resolution to trade conflicts.”
Originally published as Stock correction nearly over, despite Trump and his divisive foreign and economic policies
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