By Avi Salzman

He's serious, and that's seriously bad news for the stock market.

President Donald Trump launched a major new phase in his trade war on Wednesday, imposing tariffs on nearly every country on the globe. The selling hasn't stopped since. The Dow Jones Industrial Average plunged 9.3% in two days and fell into a correction -- down over 10% from its highs -- by the end of Friday. The S&P 500 fell 9.1% on the week, its worst drop since March 2020. At 5074, the index is down about 17% from its highs and within spitting distance of the official bear market level of 4915.

Investors have tended to take Trump seriously but not literally. The president's literal statements are worth following, however, because he's the only one who can stop the selling. He chose not to on Friday. Amid hopes he would back down and reduce the tariff rates, he sent the following message in all caps: "My policies will never change."

Never is a long time, so let's focus on the week ahead. On Saturday, 10% baseline global tariffs are set to kick in. Those are unlikely to change. That will be followed on April 9 by much higher tariffs on another subset of countries, including China, Vietnam, and the members of the European Union. The next day, China is set to impose 34% retaliatory tariffs on the U.S. Canada has also said it would impose 25% retaliatory tariffs on automobiles, another sign that the trade war may escalate.

Some stocks still seem to be trading as if the tariffs won't be fully implemented. General Motors stock, for instance, is still up over the past year.

But markets do at least seem to appreciate the danger they are in, especially if a recession occurs. Whether one can be avoided is the key to determining whether this is a short-lived selloff or a rout that takes the market deep into bear territory. Since 1950, there have been 56 pullbacks of 10% or more. Twelve months after those corrections, stocks were higher 49 times. Of the seven times they failed to rebound, six of them came during a recession, according to Truist Advisory Services.

A recession seemed relatively unlikely before the tariffs, according to most economists and strategists. But the odds have been creeping higher. The average economist surveyed by Bloomberg at the end of March saw a 30% chance of recession in the next 12 months, up from 20% at the start of the year. The percentage is certain to rise from here.

J.P. Morgan economists said late on Thursday that they now see a 60% chance of a global and U.S. recession, noting that the "direct impact of what looks like a cumulative 20%-point rise in U.S. tariff rates this year would be the largest tax increase on U.S. households and business since the Revenue Act of 1968, which preceded the 1969-70 recession." The note had a not-so-subtle title: "There will be blood."

The market may be even more pessimistic. In the median recession, stocks tend to fall 24%, so the market appears to be pricing in about a 70% chance of one, said Keith Lerner, chief market strategist at Truist Advisory Services.

The good news is that there are some signs of panic emerging in the market, Lerner said. The Cboe Volatility Index, or VIX, which tracks S&P 500 options contracts, spiked above 45 on Friday, more than twice its normal level and the highest level in months. The ratio of put options to calls -- or bearish bets to bullish ones -- hit its highest level in a year.

"What that means is that you're seeing a little bit of fear come in," Lerner said. "I want to be careful, because I'm not calling a bottom here on the market. But it is true that markets do bottom on fear."

In the short term, he thinks that "it's probably more of a two-way trade now. There's risk the market goes down lower," but any signs of progress in trade negotiations should result in "some type of short-term bounce."

It's clear that traders are still hunting for any signs of a rapprochement. A friendly social-media post from Trump about Vietnam, for instance, sent shares of Nike, which relies on that country for manufacturing its products, up sharply on Friday.

With a bear market looming, stocks could use some of Nike's momentum. That's up to one man. Will he Just Do It?

Write to Avi Salzman at avi.salzman@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 04, 2025 20:05 ET (00:05 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.