Volatility returned to the stock market early last week after a period of stability, driven by the news surrounding DeepSeek. Now, the newly-inaugurated US president Donald Trump is making a bold show of power by imposing tariffs on Mexico, Canada, and China. This move also affects the DAX, as German automakers have factories in these regions. Moreover, the Republican president has signalled that he will not shy away from imposing tariffs on the European Union.
Investor optimism, which resulted in a lack of interest in hedging against falling stock prices, now appears misplaced. Many investors had expected Trump to take a more measured approach. Instead, he looks to be using the S&P 500’s record highs as a bargaining tool, pressuring markets when stock prices rise and easing off when they fall, allowing himself to appear as a skilled negotiator. This strategy could trigger a multi-week market correction.
Historically, tariffs don’t always cause sustained stock market declines but can trigger sharp corrections. During Trump’s first term, stock markets kept rising despite his tariffs on China, though the S&P 500 experienced two drops of 12.5% and 20%. A similar scenario cannot be ruled out in the coming weeks, potentially pushing the index towards 5,000 to 5,500 points before any potential political recalibration.
These developments warrant a reality check. With high valuations, the market is ripe for potential significant corrections. After a steep market rally, a natural and healthy price retracement remains a distinct possibility.
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