Market Reels from 'Liberation Day' Trade War Fallout

The average stock has fallen 26% from its 52-week high, approaching a -2 standard deviation move, according to a new State Street Global Advisors report analyzing President Donald Trump's trade war policies.

This decline—triggered by "Liberation Day" reciprocal tariffs and subsequent retaliation—ranks alongside historic market crashes including the 1987 crash, the dot-com bubble burst and the Covid-19 pandemic, according to Strategas Research Partners data cited in the report.

Are Markets Near a Bottom?

While 50 years of market history suggests markets may be approaching a bottom, State Street warns investors should remain cautious. The report notes that, historically, market lows are retested or undercut 85% of the time, usually within four weeks to four months.

As tariff rates continue to fluctuate dramatically amid escalating U.S.-China tensions, State Street recommends investors adopt defensive positioning through safe-haven assets and quality dividend stocks to weather what could be months of market turbulence.

For investors seeking to position portfolios during this volatile period, State Street recommends several approaches: safe havens like long-term Treasurys, T-bills and gold; defensive sectors like consumer staples, utilities and health care; and dividend-growers with stable earnings and solid balance sheets.

Unprecedented Trade Policy Shift

The report characterizes the current situation as unprecedented, noting that "no US administration has ever tried to reset the world's trading system." Using President Trump's own metaphor, State Street suggests that while "the patient has survived the surgery, but recovery could be a long, slow, and painful process."

Market participants and businesses are frustrated with the rapidly changing tariff landscape, according to the analysis. The endgame remains unclear as policy goals keep shifting between improving trade deficits, raising revenues, strengthening national security and restoring manufacturing jobs.

Peter Navarro, the architect of Trump's trade policy, has claimed tariffs will raise $600 billion annually, but State Street questions this math, noting it would require consumers to continue buying imported goods despite significantly higher prices.

The firm points out that the U.S. has maintained trade deficits for over 50 years while GDP grew from $1.1 trillion in 1970 to $29.7 trillion today, with per capita GDP increasing from $5,266 to $86,601 in 2024.

The report draws a parallel to President Ronald Reagan imploring Mikhail Gorbachev to "Tear down this wall," suggesting that Trump is essentially imploring U.S. trading partners to tear down trade barriers. If Trump's reciprocal tariffs ultimately result in a global reduction in trade barriers, State Street suggests that could be a positive outcome for the global economy.