Author: Xiao Yanyan

Trump said he will begin imposing reciprocal tariffs and additional tariffs on specific industries on April 2.

On Sunday, Trump told reporters on Air Force One, "In some cases, we will charge a 'two-way' tax on foreign goods imported into the US. They charge us, we charge them, and in addition, we will impose additional tariffs on automobiles, steel and aluminum."

This indicates that despite the initial disruption to financial markets and strained alliance relations, Trump still plans to push through a more aggressive tariff regime.

Trump previously said his administration was preparing to impose what he called reciprocal tariffs, which would levy tariffs on imports from other countries based on their own tariffs and non-tariff barriers. But he also said he wanted to prepare for key US industries, including automobiles, steel, aluminum, microprocessors and pharmaceuticals. It is unclear whether these industry tariffs will be incorporated into the reciprocal tariff system or added on top of it.

Trump said: "April 2 is the day of liberation for our country. We're going to get back some of the wealth that was so stupidly given away by presidents who didn't know what they were doing."

Trump has already imposed 25% tariffs on steel and aluminum. He also announced 25% tariffs on goods from Canada and Mexico, but then gave a one-month delay for products that meet the terms of the North American trade deal (USMCA) negotiated during his first term. Trump also said Canada's energy and potash (an important fertilizer) will only be subject to a 10% tax.

The "Set and Forget" Investment Era Has Just Ended for Many Americans

The Trump administration's chaotic tariffs and government budget cuts have shocked many ordinary investors, prompting them to withdraw from US stocks and invest in cash, bonds, gold and European defense stocks. The S&P 500 index has maintained an unbeatable rally, but last week it fell into the adjustment range, and Wall Street is worried that the economy is heading into a recession.

Data from the American Association of Individual Investors shows that the proportion of investors bullish on the US stock market is currently at the lowest level since September 2022. Of course, many people have not moved their portfolios, but have followed standard financial advice to avoid hasty decisions during market volatility.

People's economic outlook is also closely related to their political leanings. Some Trump supporters say they are not worried, and are even looking for buying opportunities. However, this is a sudden change, as in recent years people have easily assumed that the stock market will continue to rise due to a strong economy.

According to data from the Investment Company Institute, in the seven days ending March 5, individual investors added a net $30.4 billion to money market funds, the largest weekly inflow in over a year.

Meanwhile, according to Morningstar, US physical gold ETFs saw net inflows of over $5 billion in February. As of last Tuesday, investors have added another $1 billion this month. Gold prices broke through $3,000 per ounce for the first time last week.

Gold ETF Net Inflows

Others have turned their sights overseas. Data from London Stock Exchange Group shows that last month, investors poured $1.8 billion into European stock ETFs registered in the US.

In the first few months of 2025, international markets have outperformed the US stock market. The STOXX Europe 600 index is up 7.7% so far this year, the German DAX index is up over 15%, while the S&P 500 is down 4.1%. Some see signs of crisis in the US market, while others see no need for concern.

Stock Index Performance This Year

Stock Market Decline Threatens Pillars of US Economy

US consumer spending is highly dependent on the wealthy, who in turn are highly dependent on the stock market. Investors are concerned that the White House's aggressive and volatile tariff war could disrupt an economic soft landing. Sentiment has already turned gloomy, and a market contraction may just be the start of a chain reaction, causing more collateral damage.

Harvard economist Gabriel Chodorow-Reich estimates that, all else being equal, a 20% drop in the stock market in 2025 could reduce this year's economic growth by up to one percentage point. As of last Friday's close, the S&P 500 index is down 4.1% so far in 2025.

A drop in stock prices could sap the two main engines of America's recent prosperity: strong household spending and corporate capital investment.

"In an economy as super-financialized as the US, asset prices can lead the economy, and a downturn in asset markets poses risks of a weakening in the real economy," said Alex Chartres of UK fund manager Ruffer.

According to Moody's data, the top 10% of US earners now account for about half of all spending, compared to just 36% three decades ago.

A recent Federal Reserve survey showed that as of 2022, the top 10% of households on average had about $2.1 million in stocks, accounting for about 32% of their net worth. In 2010, stocks accounted for about 26% of the average net worth of this group.

Over the past four years, spending by the top 10% has increased by 58%. It's not just the wealthiest who have piled into the stock market. Reports from Vanguard and Fidelity show record-high participation and contributions to 401(k) plans by the working class.

Federal Reserve data shows that as of the end of last year, 43% of US household financial assets were in stocks, an all-time high. Many low-income households don't own stocks, but the share that do continues to rise.

Value of Stocks Owned by US Households

As a result, some economists are concerned that a severe market downturn could prompt Americans to cut back on everything from vacations to new clothes, a phenomenon known as the wealth effect. Deutsche Bank economists estimate that if the stock market had just remained stable last year instead of rebounding, last year's consumer spending would have grown only about 2%, not the 3% partly driven by the stock market wealth effect.

There are some signs that consumption may already be starting to decline. Companies including Delta Air Lines, Foot Locker and Brown-Forman, the maker of Jack Daniel's whiskey, have said consumers appear to be more cautious. Retail sales fell 0.9% in January, the largest monthly decline so far in 2023, though some economists attributed this to unusually cold weather. February data will be released on Monday.

Deutsche Bank's chief US economist Matthew Luzzetti said that if nothing else changes, a 20% drop in stocks could weigh on consumer spending by 1.2 percentage points in 2025. Given that consumption accounts for about 70% of GDP, this would drag on economic growth by about 0.8 percentage points.

Independent economist Phil Suttle is concerned that as the Nasdaq index has fallen more than 10% from its peak, spooked executives may abandon plans to spend about $1 trillion on AI-related investments over the next few years.

Chodorow-Reich and two colleagues found in a 2021 study that a $1 change in stock market wealth on average affects household spending by about 3 cents. According to Federal Reserve data, as of the end of last year, U.S. households directly or through mutual funds and other products owned more than $56 trillion in stocks, so the impact of stock market fluctuations on household spending is enormous.

Economists Sydney Ludvigson and Martin Lettau in the early 2000s studied the wealth effect. Their conclusion was that, over time, stable stock returns tend to promote consumption, but people generally do not overreact to short-term market fluctuations. The challenge for economists is that, before a rebound or reversal becomes history, you cannot know which rebounds or reversals will persist.