The Trump Trade War Intensifies, Rattling Markets

The stock market sell-off continued on Tuesday as President Trump's escalating trade war with major U.S. trading partners sparked fears of a broader economic slowdown. The S&P 500 erased all of its post-election gains, while the Dow Jones Industrial Average plunged over 650 points.

The trigger for the market rout was Trump's decision to impose new tariffs - a 25% levy on imports from Canada and Mexico, and doubling duties on Chinese goods to 20%. These tariffs went into effect at midnight on Tuesday, with Canada and China quickly retaliating with their own sets of tariffs on U.S. products.

The market reaction underscores growing concerns that Trump's protectionist policies could undermine the economic growth that had fueled the post-election "Trump bump" in stocks. Many sectors that had surged on hopes for Trump's pro-business agenda, like small caps, energy, and industrials, have now given up those gains.

"The 'Trump trade' narrative that dominated many markets in Q4 is floundering," wrote Jonas Goltermann, deputy chief markets economist at Capital Economics. "Since then, US Treasury yields have dropped back, the 2-10s curve has flattened, US equities have struggled both in absolute terms and relative to those elsewhere, and the dollar has dropped back."

Investors are now betting the Federal Reserve will have to cut interest rates this year to offset the economic damage from the trade war, which is a shift from the rate hike expectations that prevailed after Trump's election. The 10-year Treasury yield has plunged over 60 basis points from its January high as safety buying drives bond prices higher.

While the market reaction has been negative so far, Treasury Secretary Scott Bessent argued that the sell-off would be temporary, saying Wall Street is not the focus of the administration's trade policies. But with growth concerns mounting, the Trump trade is clearly on shaky ground.