THE ECONOMIST: How Donald Trump provoked a wild stockmarket sell-off that shows no signs of stopping

The sell-off shows no sign of stopping. America’s S&P 500 index dropped by another 3 per cent on March 10, leaving the world’s most watched stockmarket down by almost 9 per cent since its peak last month.

The NASDAQ, dominated by tech firms, has fallen by 13 per cent. It is not quite the bold new era of American growth that President Donald Trump had in mind.

His unpredictable trade policies got things going. Tariffs of 25 per cent on imports from Canada and Mexico — which were instituted on March 4, before being suspended for a month on March 6 — top investors’ list of concerns.

But after years of impressive growth, the future of the American economy is a growing source of anxiety, too, with worries provoked by a steady drip of discouraging data.

Such news is beginning to undermine belief in American exceptionalism: after all, investors have seen much better returns in China and Europe this year. And as is often the case when markets fall, each development has revealed fresh things to lose sleep over.

During Mr Trump’s first term in office, investors came to believe that his administration’s focus on tax cuts and deregulation would ultimately overwhelm his unpredictable, protectionist tendencies.

They also saw that he was sensitive to market moves, and keen to avoid falls.

This combination was referred to as the ‘Trump put’: temporary sell-offs, often driven by the trade conflict with China, were quickly reversed as the president did whatever it took to change the market mood. Investors who sold tended to regret their decision.

This time the dynamic appears different. The new administration is more hard-nosed.

On March 6 Mr Trump said that he was not looking at the market, but was concentrating on the long term.

The same day, Scott Bessent, his treasury secretary, offered a similar view: “Wall Street’s done great. Wall Street can continue doing well. But this administration is about Main Street.”

Then, on March 9, the president avoided questions about whether America faced a recession, and warned of a “period of transition”.

Many market participants had believed that Mr Trump would use tariffs on Canada and Mexico merely as a negotiating tactic. They are gradually being convinced he really means it this time round.

And look at the lovely alternatives. In the past four weeks, while America’s leaders have harangued Europe’s politicians, the old continent’s stocks have outperformed their American peers by 12 percentage points in dollar terms, their strongest run in over 15 years.

A combination of factors, including a falling dollar and a boom in European defence stocks — driven by expectations of a resurgence in defence spending, to cope with America’s newfound disregard for the continent — have put Europe in the limelight.

Jerome Powell, the Fed’s chairman and a long-time target of the president’s ire, may have to cut rates faster than he had planned.

Even China’s moribund market has gone on a tear, inspired by hype about the progress of the country’s artificial-intelligence firms. For investors worried about their portfolios being dominated by a handful of American tech giants, a shift to overseas markets is increasingly enticing.

America’s sell-off has hit highly valued tech stocks hardest of all. Broadcom and Nvidia, two world-leading semiconductor manufacturers, are down by more than 20 per cent in the year to date.

But the stand-out loser is Tesla, an electric-car firm owned by Elon Musk, a close ally of Mr Trump, which has fallen by 40 per cent this year. On March 10 alone its value dropped by 15 per cent.

European sales of the firm’s vehicles plummeted by 45 per cent in January, as the continent’s consumers expressed their political opinions by buying other cars.

If Mr Trump wants to turn things around, which does not yet appear to be the case, it may take something big. His announcement that tariffs on Canada and Mexico would be deferred for a month did nothing to forestall the slump.

Analysts have become gloomier about the American economy’s prospects, as consumer sentiment has soured and inflation expectations have risen.

Although most are still predicting modest growth, a few are expecting a recession. Peter Berezin of BCA Research is one: he notes that, on top of all the turbulence, household savings built up during the COVID-19 pandemic have been depleted, and past rises in interest rates continue to feed through to American mortgages.

A month ago the federal-funds futures market suggested that investors believed there was a 52 per cent chance that the Federal Reserve’s policy interest rate would remain at or above 4 per cent by the end of the year.

Now the market implies a probability of less than 10 per cent, with a growing number of investors expecting more aggressive monetary easing.

Jerome Powell, the Fed’s chairman and a long-time target of the president’s ire, may have to cut rates faster than he had planned.

The S&P’s remarkable rise in recent years means it is still vulnerable to a fall.

The index has more than doubled since March 2020, trouncing global competitors.

The price-to-earnings ratio of the index, based on expectations of the constituent companies’ earnings over the next year, has dropped from 25 times to 21 times in less than a month.

But by historical standards, stocks still look expensive rather than cheap.

Great expectations for the American market, established over many years of strong performance, have become far easier to disappoint. The current sell-off is a wobble rather than a nightmare — for now, at least.