- Stocks soared on Wednesday after President Donald Trump postponed his more aggressive tariffs.
- He suggested that investor anxiety and soaring bond yields played into his decision.
- Wall Street remains wary that sweeping tariffs could reignite inflation and spark a recession.
President Donald Trump granted investors a temporary reprieve after putting them through the wringer. Wall Street isn’t breathing easy yet.
He unveiled sweeping “reciprocal” tariffs last week that tanked the stock market, sending the S&P 500 down 12% in four trading days.
On Wednesday, he postponed most of his planned import taxes above 10% for 90 days. The benchmark US stock index rallied 9.5% on renewed hopes that trade deals would be cut and a global economic downturn would be avoided.
Speaking to reporters outside the White House, Trump hinted at why he changed his mind. “People were getting a little queasy” and “a little bit yippy, a little bit afraid,” he said, suggesting that widespread investor anxiety was a factor.
Trump said the market mood had been “pretty glum” for a few days, and he’d been watching the “very tricky” bond market. Treasury yields had spiked, making it costlier for the government to borrow money and harder for it to tackle its national debt. They also paved the way for higher interest rates on Americans’ credit cards, car loans, mortgages, and other debts.
Combined with calls from foreign leaders seeking to strike deals, and pushback from business executives such as Elon Musk, Jamie Dimon, and Bill Ackman, that may have been enough to convince Trump not to wage a global trade war.
It's not over yet
European and Asian stocks rebounded Thursday, but US futures dropped as economic worries persisted. Deutsche Bank's research team said in a note that the "genie is still out of the bottle on policy unpredictability," and even Trump's 10% universal tariff represented the largest increase in decades.
They also underscored that Trump responded to China's retaliation against his tariffs by hiking them even higher, and there are "no immediate signs of either US or China backing down."
If Trump ultimately forges ahead with his original plans, the US could suffer "stagflation" — stagnating growth and steeper inflation. There's also a 50-50 chance of recession even if the delay is longer than 90 days, Tiffany Wilding, a Pimco economist, said in a note.
Higher tariffs threaten to raise prices for consumers and businesses, lowering disposable incomes and profit margins, she wrote. Foreign retaliation will hurt US exports, and it will become costlier for companies to invest in their operations, in Wilding's view.
She said the tariffs were "similar to a large and inefficiently applied consumption tax, where the only near-term winner is the US government deficit."
Recession risk
Russ Mould, AJ Bell's investment director, pointed to Treasury yields remaining elevated in a morning note. He said that signaled "lingering concern about US trade policy and while the 90-day pause is welcome news for stocks, the lack of long-term clarity may become more of an issue as time goes on."
Preston Caldwell, a US economist at Morningstar, said markets were too jubilant on Wednesday unless Trump keeps reducing tariffs and stops threatening retaliatory increases. His team predicted a "major rise in inflation, slowing of economic growth, and ~40% recession risk."
Bhunu Baweja, chief strategist at UBS, said in a note that his team believes "even these reduced tariffs imply a serious hit to growth," and companies cutting their earnings could hold back the market.
Investors whooped at the news of Trump's delay, but analysts and economists expect a walloping if he follows through with even a fraction of his plans.