Last week, President Trump finally announced his long-awaited "Liberation Day" tariff plan: a new 10% minimum tax on all goods entering the United States from overseas plus much-larger-than-expected "reciprocal" levies on imports from major trading partners such as China (34%), Japan (24%) and the European Union (20%).
The stock market plummeted in response, reflecting global fears that Trump’s new taxes on U.S. imports could disrupt supply chains, supercharge inflation and trigger a severe economic downturn.
On Monday, a series of new shockwaves — Trump threatening to raise tariffs on China by another 50%; a report that the president was considering a 90-day pause on his tariff rollout — further roiled markets, which swung wildly throughout the day (before falling again late Tuesday and early Wednesday).
On Wednesday afternoon, Trump confirmed a 90-day pause on his most of his reciprocal tariffs — and markets soared in response.
What’s the connection between Trump’s tariffs and the stock market? And how do bonds, 401Ks and mortgage rates factor in? Here’s a quick explainer (with key terms in bold).
What is the stock market?
Stocks are units of ownership that certain companies allow the public to purchase. Why? To raise money and grow their business. Each individual unit is called a share; the people who buy those shares are investors.
When you buy stock in a company, you actually become a part owner of that company. The hope is that if the business does well, the value of its stock will rise — enabling you, someday, to sell your shares for more than you paid.
A stock exchange is where investors buy and sell — i.e., trade — stocks. These exchanges can be physical places that also handle electronic trading, like the New York Stock Exchange, which is located on Wall Street in Manhattan, or they can be all-electronic, like the NASDAQ.
Each exchange has its own listing of stocks; those stocks aren’t available for trading elsewhere. Other big stock exchanges include the Tokyo Stock Exchange, the London Stock Exchange and the Hong Kong Stock Exchange.
The stock market is the sum of these stock exchanges — a big-picture way to describe all the buying and selling that's going on.
A stock index, meanwhile, is a way to measure how the stock market is performing at any given moment, and to compare it to the past. Each index tracks a certain collection of telling stocks — hundreds or even thousands of them — and computes their overall value into a single number that serves as a scorecard for the market as a whole.
The Standard and Poor's 500 (aka the S&P 500) is a stock index that tracks the 500 leading companies listed on American stock exchanges (including Apple, Microsoft, Amazon, Meta, Berkshire Hathaway and JP Morgan Chase). It's considered the "benchmark" measure of how the U.S. market is performing.
The other two major U.S. stock indexes are the Dow Jones Industrial Average and the NASDAQ Composite. The Dow is relatively small — just 30 prominent companies — making it less volatile. The NASDAQ Composite includes nearly all of the companies listed on the NASDAQ exchange.
What are tariffs?
Tariffs are import taxes paid by the company doing the importing — not by the foreign country (or foreign business) sending its goods to the U.S.
Trump has long insisted that America is being “ripped off” by foreign countries and that universal tariffs will level the proverbial playing field by incentivizing companies to retain American workers and ramp up U.S. manufacturing — all while funneling trillions of dollars in new revenue to the federal government.
He has also railed against trade deficits — how much more money we spend on another country's goods and services than we earn from selling it ours — and vowed that tariffs will balance them out.
But nearly all economists disagree with Trump's take. They say imbalances between individual countries are more a reflection of the flow of trade than unfair practices, and that most importers simply pass the added cost of tariffs on to U.S. consumers by raising their prices rather than going out of their way to replace the affected goods with American-made alternatives. Then other countries retaliate with tariffs of their own, risking a global trade war and recession.
According to the National Bureau of Economic Research (NBER), a recession is defined a "significant decline in economic activity that is spread across the economy, lasting more than a few months."
The NBER considers several factors when formally identifying a recession, including downturns in employment, income and consumer spending. But the biggest common denominator in past U.S. recessions has been two or more consecutive quarters of declining gross domestic product (GDP) — the total value of all goods and services produced within a country's borders during a specific period of time.
GDP is a key measure of how big an economy is, and whether it's growing or shrinking.
Why are Trump’s tariffs having such a big effect on the stock market?
To understand the connection between the stock market and Trump's tariffs, you need to understand how stock prices are determined.
When a company first goes public — a move known as an initial public offering, or IPO — its stock price is set by an investment bank. But from there, the price tends to fluctuate based on supply and demand. If more investors want to buy a stock (high demand) than sell it (low supply), the price tends to rise. Conversely, if more investors want to sell a stock (high supply) than buy it (low demand), the price tends to fall.
Every share of stock has an ask price (the lowest price a seller is willing to accept) and a bid price (the highest price a buyer is willing to pay). When a buyer and seller agree on a transaction price, that becomes the new price of the stock.
Supply and demand can rise and fall for various reasons. One reason is a company’s individual performance: financial health, earnings and future prospects all influence how valuable a particular business might seem.
But current events can sway investors as well.
Trump’s global trade war is a massive event — a risky gambit meant to rewire America's relationship with the rest of the world. And so far, the "market's" response — how supply and demand for various stocks has shifted since Trump’s announcement; how prices have moved on the various exchanges; how indexes like the S&P 500 have measured this movement — tells a clear story: investors expect the president’s actions to cause serious economic pain for American consumers and businesses, at least in the near term.
"Which [stocks] suffered the biggest losses?" data journalist Nate Silver wrote Friday. "They're largely consumer staples from the lower-middlebrow on up, or cyclical purchases — like autos and air travel — that Americans consume more of when they think good times are ahead and pull back from when they're in the brace position preparing for a recession."
By the same token, major U.S. indexes rebounded slightly Tuesday as investors tried to figure out what to make of conflicting reports about Trump's willingness to negotiate — the hope being that he would cut deals and ease tariffs. Then those gains evaporated when the White House raised its rate on Chinese imports to 104% — and China hit back with its own 84% tax on U.S. goods.
In Wall Street slang, Tuesday's temporary uptick — followed by a continued decline — is known as a dead-cat bounce. "Stocks often briefly rebound in moments of great uncertainty," CNN's Allison Morrow explained. "The idea is even a dead cat will bounce if it falls fast enough from a great enough height. It's also known as a sucker's rally, because it's usually not based on anything substantive."
Are we in a bear market now?
A bear market is when a stock index ends a trading day 20% lower than its last peak, signaling a sustained downturn and pessimism among investors about the future of the economy.
A bull market is the reverse: when a stock index closes 20% higher than its latest peak.
On Friday, the S&P 500 closed down 17.4% from its most recent high point (Feb. 19). A further decline of about 3% would put it in bear market territory.
Bear markets sometimes foreshadow recessions, but not always. The biggest immediate problem is for people who need to sell their stocks ASAP and might have to settle for smaller payouts — like seniors who are planning to cash in their 401Ks (i.e., the collection of investments they've been contributing to, via their paycheck, in order to save for retirement).
What about other financial indicators like bonds and mortgage rates?
Bonds are different than stocks. Like stocks, bonds are a way to raise money. But instead of ownership shares, they're more like IOUs — and even the government can issue them.
When you buy a bond from the U.S. Treasury, (a.k.a. treasuries) you're effectively lending money to the U.S. government (the issuer) for a set period of time. In return, the government promises to pay you back the amount it has borrowed plus interest — an fixed, additional borrowing fee — at a later date.
Because the U.S. government is typically seen as a reliable issuer — and the U.S. economy is typically seen as fundamentally strong — treasuries have typically served as "the safest corner for investors to take cover during times of turmoil" in the stock market, according to the New York Times.
But instead of buying treasuries, investors started to sell them off Tuesday and Wednesday — a possible sign of declining confidence in the U.S. government and economy.
Meanwhile, mortgage rates — the amount of interest banks charge when they lend you money to buy a home — dropped to their lowest level since October. Mortgage rates are connected to U.S. treasuries, and they tend to fall when the broader economy is suffering.
