Wall Street’s Tariff-Driven Slump Could Turn Into A Full Bear Market

For the past couple of years market participants have learned that whenever the market dropped, it would come roaring back. The lesson seemed clear: Any sign of weakness was temporary and presented a buying opportunity. While that rule didn’t work very well in 2022, it has generally held true since the 2008 Financial Crisis. Even the market crash caused by the full economic shutdown in 2020 turned out to be a great entry point. So, should the current turmoil, triggered by the new tariff policy, be approached the same way?

Some think it should. Despite the tough rhetoric, the administration has backtracked multiple times: reprieves for Canada and Mexico, a 90-day delay on the harsh tariffs announced on Liberation Day, and exemptions for smartphones and certain electronics all point to a pattern of softening. The market’s broad disapproval of this mercantilist approach has been so strong that officials may well pivot to trying to find a face-saving way to roll back a trade policy most economists and business leaders see as deeply flawed. If that’s how things unfold, then the recent volatility could once again prove to be another buying opportunity in a relentless bull market for U.S. equities.

However, that optimistic view overlooks a key reality: Fully walking back the disruption created by the new policies may not be possible without consequences. Even if the Trump administration retreats, much credibility has already been lost. The constant back-and-forth announcements have created a climate of deep uncertainty, eroding trust and complicating business planning.

The sharp rise in bond yields and the weakening dollar also suggest that foreign investors are beginning to lose confidence. Until now, they’ve stayed in the game largely due to a lack of alternatives, but that may be changing.

Europe could emerge as a viable alternative to the U.S. Germany is preparing to issue more than $1 trillion in new debt, per Politico Europe, which could absorb capital currently fleeing the U.S. The possibility of joint Eurozone debt issuance has also been raised, Bloomberg reported. Neither will happen overnight, but any redirection of foreign money away from the U.S. would push U.S. interest rates even higher, slowing economic growth and worsening the already ballooning federal deficit. Interest payments on the federal debt, already a heavy burden, could become even more problematic—just as Congress pushes for fiscal austerity through spending cuts.

It’s often said that if investors avoided the market every time they worried something might go wrong, they’d never invest at all. Markets are, by nature, a constant weighing of rewards against ever-present risks. But sometimes, the risks genuinely outweigh the potential gains.

One such risk is the growing consensus that the U.S. economy is heading into a recession, for some of the reasons above. If that outlook proves accurate, investors would do well to recall the bear market that followed the dot-com bubble. After peaking on March 24, 2000, the market slumped and rebounded multiple times—only to keep grinding lower until it had lost nearly 50% from the peak. The 2001 recession played a central role in that downturn and serves as a cautionary tale in today’s environment, where recession warnings are becoming increasingly common.

In that light, it’s difficult to argue that the recent market weakness should be treated as just another great entry point, like the dips of the past decade.

One of the most difficult aspects of the 2000–2002 bear market was managing the deep market swings, as the table below shows. What to make of an almost 10% rally between May and July 2000? Or the near-20% rally of April and May 2001? While it would have been tempting to think they represented an “all-clear” signal, those strong recoveries ultimately fizzled and the stock market—dragged down by prolonged economic malaise—ended up losing half its value.

This isn’t a prediction that we’re headed down the same path as in 2000, but a warning that the pattern of recent years—buy every dip—isn’t guaranteed. After all, that was also the pattern from 1995 through 2000, until it wasn’t. If a recession is indeed looming, it may be wise to approach any apparent recovery with a healthy dose of skepticism.