Three Lessons from the Tariff Tantrum

The following article first appeared in the Insights section of J.P. Morgan Private Bank’s website. It is reposted here with permission.

---

Markets threw a full-blown tantrum over the latest tariff turmoil. The abrupt pause in (some) U.S. tariffs triggered historic moves—both euphoric and unsettling—across U.S. stocks, bonds, and the dollar, leaving investors scrambling for answers.

The real shock was the magnitude of the moves. Global stocks teetered on the edge of bear market territory before rebounding, with the S&P 500 swinging 6% or more in both directions for three straight days.

U.S. Treasuries saw their steepest weekly decline in over 20 years, with 10-year yields rising about 50 basis points, while the U.S. dollar had its fourth-largest weekly drop since the Global Financial Crisis. Amidst the chaos, gold regained its footing, reaching new record highs.

For investors, the synchronized moves, especially the declines, were a wake-up call. Despite the scale back in current tariffs, trust has been shaken, and questions remain about the end state.

Currently, there’s a pause on almost all country-specific tariffs, and certain electronics levies are temporarily exempt, but the 10% universal tariff remains. Meanwhile, China faces U.S. tariffs at a staggering 145% rate after a week of tit-for-tat retaliation.

With U.S. policy uncertainty at a fever pitch, market anxiety has been concentrated in U.S. assets, prompting a reevaluation of investment strategies. Here are the three signals we learned from last week’s tariff tantrum.

1. The Chaos Suggests a Questioning of Confidence

Despite President Trump’s pause on some planned tariffs, uncertainty looms large: What’s the White House’s ultimate goal? Can tariff revenue truly bridge the $6 trillion deficit? Will uncertainty stifle U.S. investment? Can consumers absorb the shock? Is AI investment still viable with rising tech costs?

In the meantime, duties remain at their highest in the post-war period.

Since “Liberation Day,” those mounting concerns have hit U.S. stocks, bonds, and the dollar hard—a rare trifecta.

Volatility, especially in fixed income and currency markets, seems to have prompted the administration’s policy U-turn. Yet, further shakeups can’t be ruled out as the White House heads to the negotiating table.

President Trump said he plans to announce a tariff on “semiconductors and the whole electronics supply chain” in the next week, while investigations continue for pharmaceuticals, lumber, and copper.

Meanwhile, legal challenges and voices from business and policy leaders are growing louder.

To that end, multinational corporations and CEOs are in flux. Before last week’s levies hit, Apple rushed 1.5 million iPhones from India and China before tariffs hit, while Amazon canceled orders from Asia.

As the Q1 earnings season kicks off, more companies are pulling their guidance, citing forecasting challenges. Delta Airlines led the way by withdrawing its guidance entirely.

The impact of this uncertainty is already evident: for 25 of the last 26 weeks, more Wall Street analysts have lowered their S&P 500 earnings forecasts than raised them, marking the longest streak since early 2023.

Our rough estimates suggest the high-teens effective tariff rate in place today could seriously dent expected economic and S&P 500 earnings growth this year.

2. Global Diversification Looks Even More Essential

Shaky confidence is evident in recent flow data. While U.S. domestic investors have been buying U.S. stocks, foreign investors have been selling U.S. equities at a record pace, surpassing even the COVID crisis.

It’s not just stocks; 10-year U.S. Treasury yields jumped 50 basis points last week, while German Bund yields stayed flat. The two bond markets typically move in tandem, and last week marked the largest divergence on record since the fall of the Berlin Wall.

That’s stark considering the trend of U.S. exceptionalism over the last decade, where most investors didn’t need to look too far beyond U.S. orders for consistent outperformance.

While a few weeks don’t confirm a new trend, the volatility suggests global investors are recognizing the importance of global diversification.

If you’ve built up heavy U.S. weightings in recent years, like many investors, consider broadening your investments across regions and exploring currency hedging to balance your U.S. asset and dollar exposure.

Positive forces have been emerging in Europe and Japan, with opportunities to pick-up quality companies trading a discount amid the selloff. And for those whose home currency isn’t the U.S. dollar, currency considerations are becoming more impactful as the dollar faces pressure.

Diversifying doesn’t have to happen it all at once. Think of how you’d use your “incremental pound or euro” as you look ahead. We think it’s sensible to orient those additional investments internationally, rather than adding to already large U.S. overweights.

3. Market Timing Is a Risky Game

There’s no sugar-coating the tough start to the year. The S&P 500 is still down over -10% from its January highs, even as some tariff reprieve pulled it back from the edge of a bear market.

While there’s no clear historical precedent for today’s environment, past selloffs can still offer valuable lessons.

Bear markets aren’t one-size-fits-all; they vary in cause, magnitude, and recovery speed. Structural bear markets tend to stem from financial bubbles, cyclical ones from economic cycles, and event-driven ones from sudden shocks.

So far, the current selloff looks event-driven, sparked by “Liberation Day” and its self-inflicted market pain.

That’s not to say, however, it couldn’t transition into a cyclical bear market if growth fears mount. It seems that everyone lately—from Wall Street economists to political pundits, talk show hosts, and metro commuters—has been debating recession risks.

So what does history tell us? Both event-driven and cyclical bear markets usually see U.S. stocks fall around -30%, but event-driven ones tend to rebound faster.

To that end, it’s promising that the S&P 500 recently tested and rebounded from its early 2022 highs (around the 4,800 level).

But while stocks may face more turbulence, we don’t think exiting markets is the answer—in fact, history suggests trying to time it is risky. Days with big stock losses tend to cluster with days seeing big gains.

In the last 20 years, seven of the 10 best market days occurred within 15 days of the 10 worst. For instance, right after “Liberation Day,” the S&P 500 fell over 5% on two straight days, but surged 9.5% the following Wednesday. Missing that gain is like missing 1.5 years of equity returns based on our Long-Term Capital Market Assumptions.

In times like these, perhaps the most important thing for investors to do is to revisit their plan. Understanding your goals and defining investment success are key to effective portfolio construction.

For those seeking to take action amid the volatility, we see structured notes with downside protection, gold, investment grade bonds, and hedge funds as sensible ports of call.

---

About the authors: Madison Faller is a global investment strategist with J.P. Morgan Private Bank, based in New York. Matthew Landon is a London-based global investment strategist with J.P. Morgan Private Bank.