Global markets have fallen more than 10% in just two sessions after the announcement by U.S. President Donald Trump to impose historically high tariffs, determined arbitrarily by the U.S. administration. This drop represents the fourth worst two-day decline in the past 50 years.

The massive sell-off worsened on Friday when China announced retaliatory tariffs of 34% on U.S. products. This exchange of threats has intensified fears of a protectionist escalation and has shifted focus to possible retaliation from other trade partners such as the European Union.

Additionally, Federal Reserve Chairman Jerome Powell further weakened market sentiment by suggesting a cautious stance regarding interest rate cuts, arguing that tariffs could have persistent inflationary effects.

Declines in major stock markets

Source: Bloomberg and prepared by MoraBanc

These declines reflect investor concern and the uncertainty generated around the economic repercussions of these trade policies, pricing in a strong impact on growth and inflation, and eroding consumer and business confidence.

This has led the market to speculate about Trump’s real intentions:

1. Does he want to use tariffs as a tool to pressure for quick negotiations?
2. Does he intend to keep them in place structurally?
3. Could he impose more tariffs?
4. Would he be willing to provoke a sharp recession for strategic reasons?

In this situation, what are the catalysts that could change the trend?

1. Change of opinion from the White House: delaying or canceling the tariffs.
2. Judicial measures: lawsuits to halt them (though with limited impact).
3. Reduction in effective tariff rates: Vietnam and Cambodia have already started negotiations. But an agreement with China and/or the EU would be needed to reduce the current effective tariff from 25% to around 10–15%.
4. Fed intervention: if financial stress increases, Powell could act despite his current caution.

Market outlook in times of volatility

• High-quality government bonds have acted as a safe haven asset since the announcement of the tariffs. We believe they can continue to do so, without needing to take on very long durations due to inflation risk, and simply by taking advantage of current yields/coupons.
• Gold, the safe haven asset par excellence, which generally acts as a hedge against geopolitical risk, can be an interesting option to diversify investments and protect against inflation risk stemming from tariff policies.
• In credit (corporate fixed income), where we have already been more cautious since the beginning of the year, we believe current corrections could deepen, creating medium-term opportunities. For now, we would remain cautious, preferring high-quality bonds.

Looking beyond stock market volatility

• For investors with little exposure or a long-term view, these episodes have historically represented good entry points into equity investments (a VIX above 40 has often been a good point for medium- to long-term investing).
• Valuations, which were already attractive outside the U.S. at the beginning of the year before the current corrections, now represent even more interesting entry levels to diversify portfolios.
• Current market levels, even if the economy enters a slowdown/recession scenario, can be expected to deliver positive results in the medium to long term.