- Potential catalysts to drive a market rebound include a pause on tariffs, countries announcing deals with Trump and the Federal Reserve stepping in
- There are also potential catalysts that could take markets even lower, such as Trump escalating tariffs beyond China on countries who retaliate
- Investors will be watching key data points to see if Liberation Day is hurting consumers and businesses
- Bond markets could also provide a clue about how investors are thinking
“Markets are acting like a yo-yo, slumping on the Liberation Day announcement for three trading days in a row, then jumping back, before retreating again,” says Dan Coatsworth, investment analyst at AJ Bell.
“Given Trump’s unpredictability, it’s impossible to know where markets will go next. However, there are three potential factors that could trigger a rebound, and three more that could take markets even lower.
“If we do see a further decline in markets, it’s important not to panic. It’s perfectly normal for markets to go through difficult periods and investing is about taking a long-term view. Riding out any market downturns is often the best strategy rather than trying to time when to get out and back in.”
What could cause markets to bounce back?
Scenario 1: A pause on the latest round of tariffs
“Governments and businesses have had little time to plan for the new administration, or even talk to Trump about striking a deal. The sensible thing to do is to impose a short period – such as 90 or 120 days – to conduct negotiations and plan accordingly. The queue for the White House could soon be all the way down the road and Donald Trump himself admits that he ‘can’t see that many that fast’.
“A pause on tariffs would bring relief to investors that governments have a better chance of convincing Trump to lower the rates as they would have more time to negotiate. It’s unlikely that Trump would abolish them completely, so investors will be hoping for the Tesco effect – ‘every little helps’ when it comes to lowering tariffs.
“We had speculation earlier this week that Trump might pause tariffs but that was quickly shot down by the White House. It might have been that the US president didn’t want someone else to claim credit for breaking the news. Trump likes to be in control at all times so if he was the one to announce a pause to tariffs and markets rallied, he could claim credit for ‘saving’ the markets, even though he was the one who broke markets in the first place.”
Scenario 2: Countries begin to announce deals that lower tariffs
“A foreign government reaching an agreement with Trump so the US gets something it wants, and the recipient has a lower tariff, could send a positive signal to markets. Investors might think this sets a precedent and other countries will follow suit.”
Scenario 3: The Federal Reserve steps in
“The Fed might come across as a sloth, patiently waiting for data before it makes any decision, and even then, it only acts slowly. However, the central bank has form in acting fast when there is a crisis. For example, its decision to step in during the Covid crisis and essentially say it would do whatever it took to revive the US economy and support markets shows that the Fed is not asleep at the wheel.
“Wall Street calls this invention a ‘Fed put’, an act of support when markets fall sharply and need a lifebuoy. At the moment, it doesn’t feel as if there is enough to make the Fed put on its lifeguard uniform. The 10% to 12% pullback in markets over three trading days following Liberation Day might have felt alarming yet shares were comfortably up across the board yesterday.
“Markets move up and down all the time and the sell-off doesn’t feel dramatic enough for the Fed to step in. However, a lot can change in a day, so investors won’t be sitting comfortably.
“There are some strange movements on the bond market which means now is not a time to be complacent. US Treasuries have a reputation for being a safe-haven asset, yet prices on the 30-year bond slumped earlier today. Heavy selling is a red flag, meaning someone is either deeply worried about a US recession or foreign investors are staging a buyers’ strike on US assets and/or dumping them. Investors and the Fed will be on high alert as this is a fluid situation.”
What could upset markets and cause further share price declines?
Scenario 1: More countries retaliate and are hit with an escalation of US tariffs
“The US raising tariffs on China to 104% has put markets into reverse, with investors shocked that a) Trump actually went ahead with this threat and b) it potentially renders countless Chinese exports as uneconomical for the supplier.
“This puts the pressure on other countries to ensure their tariff negotiations go well. The last thing foreign governments want is for their meeting to be a repeat of Trump and JD Vance’s recent White House conference with Ukraine’s Volodymyr Zelenskyy which descended into chaos.”
Scenario 2: Weak data points show Liberation Day is starting to cause damage beyond the value of assets like shares and bonds
“Markets will not be happy if we get a plethora of data that shows Liberation Day is hurting businesses and consumers beyond the value of their savings and investments.
“Investors will be watching for data points on business and consumer confidence, the jobs market, purchasing manager intentions, economic growth and more. Hard facts are impossible to ignore and proof that Trump’s tariff war is backfiring could cause blood pressures to go higher.”
Scenario 3: Bond yields remain elevated
“Government bond yields have ticked up today, including US Treasuries whose 30-year bond briefly hit 4.516%, worrying because they were only around 4% last week. That’s a massive jump. Bond prices move in the opposite direction to yields – so rising yields mean bond prices have fallen.
“If benchmark borrowing costs are elevated and inflation shoots up because of tariffs, it poses major challenges for the economy. Central banks would normally fight higher inflation with higher interest rates – but a weak economy would need lower rates to stimulate spending. That creates lots of uncertainty, which is the last thing markets want.”
