Trading on Fear: Understanding Policy Shockwaves Moving Through the Markets
“Whipsaw movements in country tariff rates will do nothing to reduce already record levels of trade-policy uncertainty. Trump appears to consider uncertainty a positive for negotiations. For businesses and markets, it’s a drag.”
— Economists Rana Sajedi, Maeva Cousin, and Tom Orlik @ Bloomberg Economics
Like many investors over the last few weeks, we’ve fallen into a new morning routine: checking the US equity market futures to see whether it’s likely to be an “up 3%” or “down 3%” day. Such extreme volatility has seemed to be the only certainty for stock investors facing a daily stream of updates and commentary on Trump 2.0 tariffs, the reactions of America’s trading partners worldwide, and the impact all of this will have on the economy and markets.
Of course, it’s not unheard of for stocks to witness big daily gains and losses. Looking at the last 65 years of S&P 500 Index trading activity, spanning over 16,000 trading sessions from 1965 through the end of 2024, we find that the S&P 500 has experienced moves of at least 3% up or down on exactly 241 occasions. In other words, just about four “big days” per year. To put things into perspective, we’ve witnessed four such days—a whole year’s worth—in just one calendar week following the Trump administration’s April 2nd “Liberation Day” announcement of broad US tariffs.
That kind of jarring uncertainty is also showing up in the VIX “fear index“, which tracks implied volatility in S&P 500 options, giving us a real-time gauge of equity investors’ anxiety. Over the last decade, the VIX showed average expected volatility for the S&P 500 of roughly 18%: a relatively tranquil state for a “risk asset” like common stocks. In the week following Liberation Day, driven partly by those big up and down days we just mentioned, the VIX surged to over 50% annualized volatility before settling in at just over 30% in the last week.
So far, we’ve been thinking about uncertainty in the markets: investors trying to determine what a trade war might mean for corporate earnings and the price of companies’ shares. Behind those stocks, there’s a more fundamental type of uncertainty, with consumers and companies’ managers wondering where in the world tariffs will land when all is said and done. Uncertainty over the fundamentals of trade is even more pronounced than market volatility.
We can actually visualize the fear around Trump 2.0 tariffs quite easily, thanks to Professors Scott Baker, Nick Bloom, and Steven Davis, a group of economists at Northwestern and Stanford, who statistically analyze keywords in the text of over 2,000 US newspapers to chart different types of economic policy uncertainty. When we plot their measures of uncertainty specifically related to trade, we find that although Donald Trump’s first term was already record-breaking in terms of trade stress, the economic shock of the second term has been positively off the charts.
Trump 2.0 tariffs push trade policy stress to historic highs
Chart: Trade Policy Uncertainty Index, Jan. 1995 – Mar. 2025
Source: Rayliant Research, using index published by Bloom, Baker, and Davis, as of Mar. 31, 2025
Looking at the chart above, with an eye-popping break from the norm—quite literally ripped from the headlines—it’s easy to see why investors have been collectively freaking out, herding out, or piling into stocks from one day to the next. On the other hand, it’s worth remembering that financial and economic uncertainty like that we’ve discussed and plotted above likely doesn’t last forever. Historically, it often hit unexpectedly; it tended to come in clusters, but it eventually resolved, often just as unexpectedly.
That can be a challenge for market timers attempting to dip in and out at market bottoms and tops, but it’s good news for those who stay fully invested. When one zooms out, episodes of volatility like the one we experienced in April 2025 are often barely discernible on a chart. Remember those statistics around the S&P 500 we referenced earlier? The total return to US stocks over those 65 years—complete with 122 “down days” of at least 3%—comes to around 10.4% per annum: a cumulative 64,000%. That is not a bad performance for an investor willing to buy and hold through those volatile patches that arise from time to time.
Disclosure: The reader should not assume that an investment in the indexes described above was or will be profitable. The opinions contained herein are subject to change without notice and should not be construed as investment advice. Past performance is not indicative of future results.
Advisory Services offered through Sowell Management, a registered investment adviser. This material is for information purposes, educational purposes, and/or illustrative use only. The material presented does not constitute investment advice and is not intended as an endorsement of any specific investment. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. Investing involves risk including the potential loss of principal, and unless otherwise stated, are not guaranteed. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
The views are subject to change and are not intended as a forecast or guarantee of future results. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Trek Wealth Solutions believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Trek Wealth Solutions’ view as of the time of these statements.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.
The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.
Trading on Fear: Policy Shocks Behind the Market Moves
Trading on Fear: Understanding Policy Shockwaves Moving Through the Markets
“Whipsaw movements in country tariff rates will do nothing to reduce already record levels of trade-policy uncertainty. Trump appears to consider uncertainty a positive for negotiations. For businesses and markets, it’s a drag.”
— Economists Rana Sajedi, Maeva Cousin, and Tom Orlik @ Bloomberg Economics
Like many investors over the last few weeks, we’ve fallen into a new morning routine: checking the US equity market futures to see whether it’s likely to be an “up 3%” or “down 3%” day. Such extreme volatility has seemed to be the only certainty for stock investors facing a daily stream of updates and commentary on Trump 2.0 tariffs, the reactions of America’s trading partners worldwide, and the impact all of this will have on the economy and markets.
Of course, it’s not unheard of for stocks to witness big daily gains and losses. Looking at the last 65 years of S&P 500 Index trading activity, spanning over 16,000 trading sessions from 1965 through the end of 2024, we find that the S&P 500 has experienced moves of at least 3% up or down on exactly 241 occasions. In other words, just about four “big days” per year. To put things into perspective, we’ve witnessed four such days—a whole year’s worth—in just one calendar week following the Trump administration’s April 2nd “Liberation Day” announcement of broad US tariffs.
That kind of jarring uncertainty is also showing up in the VIX “fear index“, which tracks implied volatility in S&P 500 options, giving us a real-time gauge of equity investors’ anxiety. Over the last decade, the VIX showed average expected volatility for the S&P 500 of roughly 18%: a relatively tranquil state for a “risk asset” like common stocks. In the week following Liberation Day, driven partly by those big up and down days we just mentioned, the VIX surged to over 50% annualized volatility before settling in at just over 30% in the last week.
So far, we’ve been thinking about uncertainty in the markets: investors trying to determine what a trade war might mean for corporate earnings and the price of companies’ shares. Behind those stocks, there’s a more fundamental type of uncertainty, with consumers and companies’ managers wondering where in the world tariffs will land when all is said and done. Uncertainty over the fundamentals of trade is even more pronounced than market volatility.
We can actually visualize the fear around Trump 2.0 tariffs quite easily, thanks to Professors Scott Baker, Nick Bloom, and Steven Davis, a group of economists at Northwestern and Stanford, who statistically analyze keywords in the text of over 2,000 US newspapers to chart different types of economic policy uncertainty. When we plot their measures of uncertainty specifically related to trade, we find that although Donald Trump’s first term was already record-breaking in terms of trade stress, the economic shock of the second term has been positively off the charts.
Trump 2.0 tariffs push trade policy stress to historic highs
Chart: Trade Policy Uncertainty Index, Jan. 1995 – Mar. 2025
Source: Rayliant Research, using index published by Bloom, Baker, and Davis, as of Mar. 31, 2025
Looking at the chart above, with an eye-popping break from the norm—quite literally ripped from the headlines—it’s easy to see why investors have been collectively freaking out, herding out, or piling into stocks from one day to the next. On the other hand, it’s worth remembering that financial and economic uncertainty like that we’ve discussed and plotted above likely doesn’t last forever. Historically, it often hit unexpectedly; it tended to come in clusters, but it eventually resolved, often just as unexpectedly.
That can be a challenge for market timers attempting to dip in and out at market bottoms and tops, but it’s good news for those who stay fully invested. When one zooms out, episodes of volatility like the one we experienced in April 2025 are often barely discernible on a chart. Remember those statistics around the S&P 500 we referenced earlier? The total return to US stocks over those 65 years—complete with 122 “down days” of at least 3%—comes to around 10.4% per annum: a cumulative 64,000%. That is not a bad performance for an investor willing to buy and hold through those volatile patches that arise from time to time.
Disclosure: The reader should not assume that an investment in the indexes described above was or will be profitable. The opinions contained herein are subject to change without notice and should not be construed as investment advice. Past performance is not indicative of future results.
Advisory Services offered through Sowell Management, a registered investment adviser. This material is for information purposes, educational purposes, and/or illustrative use only. The material presented does not constitute investment advice and is not intended as an endorsement of any specific investment. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. Investing involves risk including the potential loss of principal, and unless otherwise stated, are not guaranteed. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
The views are subject to change and are not intended as a forecast or guarantee of future results. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness. While Trek Wealth Solutions believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Trek Wealth Solutions’ view as of the time of these statements.
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.
Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock’s weight in the index proportionate to its market value.
The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 actively traded “blue chip” stocks, primarily industrials, but includes financials and other service-oriented companies. The components, which change from time to time, represent between 15% and 20% of the market value of NYSE stocks.
The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. The index includes all Nasdaq listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debentures.