Perspective – Written by Philip Pilkington
Markets have been subject to a wild ride since the announcement of “Liberation Day” by U.S. President Donald Trump in April. The initial reaction to the announcement was complete chaos. In less than a week, the S&P 500 fell by almost 14 percent. Stock market volatility rose to the highest level it had seen since the beginning of the lockdowns in 2020. And, perhaps most importantly, yields on 10-year Treasury notes went from around 4 percent to around 4.5 percent in a matter of days. This extreme market turmoil led the Trump administration to seemingly back down in the ensuing days. Only seven days after the original tariff announcement, the Trump administration announced a 90 day pause. Stock markets were ecstatic and quickly rallied back to previous highs. Traders started to discuss the “TACO trade,” an acronym for “Trump Always Chickens Out.”
Yet despite the rally in equities markets, all was not what it seemed. The TACO stock market rally was only a superficial bout of exuberance that covered up much more fundamental structural shifts in American financial markets. At the same time, the tariffs that were enacted are starting to have an impact on revenues, which ensures not only that they are likely to remain permanent, but also that both the current Trump administration and future administrations will be tempted to use the tariff mechanism again to further raise revenue. Understood in this way, Liberation Day has very likely locked the American economy on a path that will be difficult to get off.
The full analysis is available here.