Stock Vigilantes Declare: 'Mr. President, Tear Down This Tariff Wall!'

China imposed a 34% tariff on imports of US goods in retaliation for President Donald Trump's trade war today. The S&P 500 continues to fall freely and the Nasdaq entered bear market territory this morning.

On March 10, when the S&P 500 closed at 5614.56, we wrote in our QuickTakes: "The Stock Market Vigilantes have spoken. They don't like tariffs, and they don't like mass firings of federal workers. That's because they don't like stagflation, and they fear that Trump 2.0's focus on these measures could cause a recession with higher inflation."

We observed and warned: "The result so far is a trade war with China and Canada that is likely to widen on April 2, when the Trump administration is scheduled to announce reciprocal tariffs around the world including on Europe and India. That has incited the Stock Market Vigilantes to go on the warpath, especially after Trump told [Maria] Bartiromo: 'What I have to do is build a strong country. You can’t really watch the stock market.' Silly us: We expected him to look for positive reinforcement of his policies from the stock market."

Here's more from our March 10 QuickTakes: "Yesterday, we acknowledged that we can't rule out that a bear market started on February 20. The risk now is that if the selloff continues, the negative wealth effect will increase the odds of a recession, which would widen the federal budget deficit and increase the debt-to-GDP ratio. 

We concluded: "Trump also risks losing Republican-held seats in the mid-term elections, resulting in political gridlock during 2027 and 2028. Americans don't take very well to pain in the here and now with promises of gains later. In other words, Trump's 'Golden Age' could be tripped up by stagflation. Veteran Democratic strategist James Carville recently advised Democrats to sit back and watch Trump self-destruct."

Since March 10, the S&P 500 fell to an intraday low of 5118.78 today, down 16.7% from the February 19 record high. On April 2, Trump imposed an average "reciprocal" (i.e., negotiable) tariff of around 25% on the world stacked on top of a permanent 10% tariff on everybody. On top of that, Trump had already imposed a 10% tariff on China and a 25% tariff on goods from Canada and Mexico not covered by the Canada-United States-Mexico Agreement (USMCA).

The consensus view was that April 2 (dubbed "Liberation Day" by Trump) would mark "peak uncertainty" and make a bottom for stock prices. Instead, the Stock Market Vigilantes got madder. Will Trump blink in the face of the plunge in stock prices? Consider the following possibilities: