Tariffs, Tantrums and Turning Points: Navigating Post-Liberation Day Markets

Markets don’t fear bad news as much as they fear ambiguity—and “Liberation Day” delivered plenty of the latter. What was initially framed as a decisive step toward trade clarity instead deepened confusion, rattled investors, and raised more questions than answers. With reciprocal tariffs introduced using a highly controversial and opaque formula, market hopes for direction gave way to heightened volatility and renewed concerns about inflation, growth, and credibility. What follows is a closer look at how the tariff policy unfolded, why it spooked markets, and what signals to watch for as the dust begins to settle.

In the lead-up to “Liberation Day”, a segment of the market had anticipated that the event would help dispel uncertainty and perhaps lay the groundwork for higher prices. However, the outcome was quite the opposite. Uncertainty intensified considerably, triggering a pronounced negative market response. Questions persist over reciprocal tariffs and President Trump’s overall tariff strategy, leaving a cloud of ambiguity hanging over the outlook.

It's not surprising the uncertainty that resulted from “Liberation Day” given the formula that was used by the Trump administration to calculate the reciprocal tariffs. The tariff rates appear to be based on a simple formula linked to America’s trade deficits, not the actual tariffs or trade barriers other countries use, as the White House first claimed.

Economists say this method is misleading and has no real economic logic—it just targets countries that sell more to the US than they buy. Social media fact-checkers pointed out that the formula doesn’t include any real data on other countries' tariffs.

Some experts believe this vague approach might offer flexibility in trade talks, but it could also damage US credibility. The plan was further criticised for targeting places with no population or trade, such as the Heard and McDonald Islands, which have no residents and export nothing to the US.

Due to the underlying calculations, the tariffs imposed turned out to be significantly higher than the market had anticipated—raising concerns about stagflationary risk. In other words, higher inflation combined with slower growth. This is a policymaker’s nightmare scenario, typically the result of a supply shock, which limits the effectiveness of monetary policy in addressing either inflation, growth, or both.

Perhaps to emphasise the stress the market was under, when President Trump offered a 90-day reprieve (except for China), the S&P 500 spiked higher by a remarkable 9.52%. One of the reasons, President Trump cited for this about-turn was the bond market’s response to the tariff policy.

However, the market is not out of the proverbial woods yet. Being in the midst of Q1 earnings season, forward guidance is likely to be murky which potentially acts as a headwind on the market going forward until we get some clarity.

In fact, technically, we would feel much more comfortable if the market were to close above last week’s high of 5,481, as this would suggest the potential for a bottom. Even then, a higher trough followed by a higher peak on the weekly timeframe would significantly increase the likelihood of confirming a bottom. However, the Federal Reserve is currently in observation mode, meaning that a reduction in the discount rate is likely off the table for now. As a result, support for the market from this factor cannot be relied upon until more information is available.

An interesting aspect is the relationship between 10-year Treasury real yields and the S&P 500. At present, the correlation is positive at around 36%—not particularly strong, but notable. In our view, the ideal scenario would see this relationship turn negative. While the Federal Reserve remains in wait-and-see mode, a strongly negative correlation is unlikely in the near term. That said, the real yield currently sits at 2.14%, which is a relatively comfortable range for equities. If it holds steady at these levels, the S&P 500 may still find enough of a tailwind to generate upward momentum. Should that occur, we would expect the correlation to turn modestly negative—a development we would view as favourable.

The caveat here is that the bond market must remain stable and free from any tantrums. If bond vigilantes begin dumping bonds and pushing yields higher, it could prove highly disruptive—raising the market risk premium and triggering renewed pressure on equities. Bond vigilantes typically surface when policy is seen as disruptive, such as when it’s viewed as inflationary. This may have contributed to last week’s sharp rise in yields, potentially prompting President Trump to announce the 90-day pause. Another possible driver could be foreign investors offloading US Treasuries, either in retaliation or due to diminished confidence stemming from the tariff policy. However, such actions may also destabilise foreign economies, given the limited alternatives for holding liquid, dollar-denominated assets to fund US debt.

So, we haven’t quite gone over the edge just yet. The 90-day pause appears to have reintroduced a degree of stability, with the bond market calming for now and equities remaining above bear market territory. In this uncertain environment, Q1 earnings—particularly forward guidance—will be key. If they help reinforce market stability, we may begin to see the formation of a higher trough followed by a higher peak, signalling a potential bottoming process.

While the 90-day pause has offered a temporary sense of relief, it is far from a resolution. The underlying issues—ranging from questionable tariff methodologies to uncertain policy direction—continue to weigh heavily on market sentiment. Until clarity emerges on trade strategy, monetary policy direction, and the bond market’s trajectory, investors are likely to remain on edge. For now, stability hinges on earnings guidance, yield behaviour, and the hope that cooler heads prevail in policy circles. The road ahead may still be rocky, but if key variables align, the groundwork for recovery—and perhaps a sustainable market bottom—may yet take shape.