Murtogg: If he were telling the truth, he wouldn’t have told us.
Jack Sparrow: Unless, of course, he knew you wouldn’t believe the truth even if he told it to you.
— From Pirates of the Caribbean
Usually, big decisions have a shock and awe element. Think of DEMO or Covid lockdowns. That’s why it is shocking, isn’t it? It’s like the knockout punch from a different direction — someone has no clue it is coming. One can’t be surprised if markets crack in reaction to such events.
But when it comes to the tariff boxing game Trump unleashed last week, he has been relentlessly warning for a long time. He made it clear about the punch and its direction. He was telling the truth, but investors didn’t believe him. The consequence of such investor lethargy is the market chaos of last week.
The two-day loss in percentage terms in the case of the Nasdaq Composite (down 11.44 per cent) and S&P 500 (down 10.53 per cent) was the third worst in the last 20 years, while in the case of Dow Jones (down 9.26 per cent), it is the fourth worst. And add to this, the 110.65 per cent spike to 45.31 in what is called the fear index or the CBOE Volatility Index (CBOE VIX) — the third worst spike. Only during the dark days of the Great Financial Crisis or the Covid lockdowns had they endured a two-day period worse than what transpired last week.
Now, compared to this, global indices have fared better. For example, India’s Nifty 50 has shown amazing resilience by slipping only 1.83 per cent in two days. Japan’s Nikkei 225 is down 5.45 per cent, while the reaction in China and Hong Kong (both markets were closed on Friday) have been muted so far. While their reaction to retaliatory tariffs imposed by China late Friday is to be seen on Monday, are investors here lethargic or pragmatic?
Brass tacks
In a speech at the American Dynamism Summit organised by venture capital firm Andreesen Horowitz, US Vice-President JD Vance lamented at how the US has compromised its industrial base and sent it to other countries. He gives an example in ship-building of how the US used to build three ships every two days during World War 2, as compared to just five commercial chips over an entire year now or what is a mere 0.1 per cent of global ship-building. In his view, deindustrialisation poses threat to not just national security but also the workforce, depriving many of a productive purpose and loss of personal and communal identity.
Not just him, across the administration, starting from Trump to Treasury Secretary Scott Bessent or Commerce Secretary, have been echoing a similar message. An America that is seeing its industrial base erode is not what represents the idea of America. The tariffs are a weapon to reverse this trend. In the process apparently, they seem to be okay with pain in the stock markets and economy, as it will also help them achieve another core objective — lower 10-year bond yields. A pain in the economy and stocks will result in investors flocking to bonds in a risk-off trade and lower the yields.
Whether the approach is right or wrong, their intentions appear clear. Investors betting on a rebound in equity markets will have to weigh this against the tolerance of the administration to withstand the economic and stock market pain.
For example, in the chaos of recent weeks, the Magnificent Seven and AI stocks that many institutions and individuals are over-invested in, have got routed. It is unclear whether it can get worse over the next few weeks if the administration is unrelenting in its objective. Indices in India and other countries cannot remain immune in such cases. What is not helping now is that valuation, even after the fall from peak levels in the last year, is still not cheap.
Given these, it may be better to take Trump and his team and what they say, at face value. The risk of a downside outweighs the upside reward in the current context.
Published on April 5, 2025
