Volatility Reigns as Stocks Fall Sharply After Tariff Pause Rally

Financial markets continued to post wide swings on Thursday, with stocks falling back sharply in a partial reversal of Wednesday’s massive rally.

The Morningstar US Market Index closed 3.5% lower, as did the S&P 500 benchmark index. The tech-heavy Nasdaq closed 4.3% lower.

Thursday’s losses follow a dramatic rally on Wednesday, sparked by President Donald Trump’s turnabout on trade policy. After Trump said he would pause many of the tariffs he announced on April 2 for 90 days, the US Market Index jumped 9.5%. However, stocks quickly pared back those gains amid the ongoing trade war with China. On Wednesday, Trump raised tariffs on Chinese goods to 145%, which some observers say amounts to a trade embargo on the country.

Wednesday “was not the the all-clear signal,” says Dave Sekera, chief US market strategist for Morningstar. He expects plenty of positive and negative headlines over the next few months as negotiations between the United States and its trading partners get underway, and he says its too soon to tell if the stock market has bottomed out.

Technology stocks were the worst performers on Thursday, losing more than 4.5%. Meanwhile, the Morningstar US Consumer Defensive Index was roughly flat for the day, edging down just 0.08%.

Among the most active stocks, Nvidia NVDA declined 5.8% on Thursday, Apple AAPL was down 3.5%, and Tesla TSLA closed 7.2% lower.

Stocks Avoid Bear Market Losses

Overall, the stock market is down 7.0% since the start of the selloff on April 3 and 14.8% since its most recent peak on Feb. 19.

Sekera says the past week’s action is reminiscent of the tone of the selloff during the financial crisis in 2008, when sentiment could turn quickly and major losses followed major gains, and vice-versa. He points out that stocks have not reached bear market losses of the magnitude seen in 2022, when stocks fell 25% over the better part of a year.

This past week’s action may feel more painful to investors because of its speed. “We haven’t fallen as much, but we’ve fallen faster,” Sekera says.

Markets Look Through Soft Inflation Data

Investors appeared to largely shrug off a softer-than-expected read on inflation on Thursday. The Consumer Price Index fell 0.1% in March from the prior month. Economists had forecast a 0.1% increase.

“In the absence of the looming tariff impact, today’s inflation data would bring a sigh of relief,” says Preston Caldwell, senior US economist at Morningstar.

Bond Yields Edge Higher

Bond yields extended their recent rise on Thursday. Yields, which move in the opposite direction of bond prices, have been pushing higher even as economists have sharply ratcheted up the odds of a recession. The selloff in the bond market since Trump’s April 3 announcement was reportedly a key factor in his decision to delay tariffs against most countries.

The yield on the 10-year US Treasury rose to 4.40% from 4.34% late Wednesday. “Bond market discipline has again shown itself a powerful tool for governments to reorient their approach,” says Nichola James, managing director in the global sovereign ratings group at Morningstar DBRS. “What we are looking at now, though, is not an abandonment of fundamental US policy, but an alternative pathway to achieve it. In this environment, damaging uncertainty for companies continues.”

On Wednesday, investors had sold off US government bonds, calling into question their status as safe assets. In addition, many hedge funds had been forced to liquidate their positions due to the market crash. German government bonds, or bunds, benefited from the flight from US securities. On Thursday, the trend was reversed and the 10-year bund marked an increase in yields to 2.65% from 2.58% a day earlier. Among peripheral government bonds, the Italian 10-year BTP has remained stable at 3.87%, while the BTP-Bund spread is down a sharp 7.44% to 120 points from Wednesday.

International Equities Rally

While Japan’s Nikkei 225 closed 9% higher, Chinese stocks largely sat out the relief rally as the country remained at the center of Trump’s ire, facing further increased tariffs. The Morningstar Eurozone 50 Index gained 4.3%, with UK stocks up 3.27%.

The 90-day pause is “a big positive for markets; many are saying the worst-case scenario is now off the table,” says Morningstar chief European market strategist Michael Field. “But the overhang of the trade war is likely to persist for some time.”