Summary

The stock market has experienced its worst weekly decline in six months due to uncertainties around trade policy and economic forecasts. Tariffs, federal government layoffs, and Treasury Secretary Scott Bessent's forecast of a "detox period" for the US economy have driven investors into risk-off mode. The Nasdaq 100 briefly dipped into correction territory on Friday, falling 10% from its mid-February high, and is down more than 3% this week, along with the S&P 500.

Uncertainties Around Trade Policy Drive Stock Market Volatility

The stock market has been facing significant volatility in recent weeks due to uncertainties around trade policy. The imposition of tariffs on goods from Mexico and Canada by President Donald Trump's administration has created uncertainty among investors. The exemption of items covered by the USMCA trade agreement at the last minute did little to alleviate concerns, as the possibility of reciprocal tariffs remains a looming threat.

The impact of these uncertainties can be seen in the performance of various stock indices. The S&P 500 experienced its worst weekly decline since early September, when the index dropped 4.3% following a weaker-than-expected August jobs report. This week's decline has been particularly noteworthy, as the index tested its 200-day moving average for the first time since November 2023. This technical threshold is significant, as a decisive break below it could signal more pain to come.

The impact of trade policy uncertainties can also be seen in the performance of semiconductor stocks. Nvidia, one of the top chipmakers, has seen its shares drop by 10%, extending its decline to its lowest level since September. The company's market capitalization has been wiped out by over $1 trillion since peaking in early January. Marvell Technology, another prominent player in the sector, has also been affected, with its earnings results and weaker-than-expected outlook contributing to the sell-off.

However, not all semiconductor stocks have been negatively impacted. Broadcom, for instance, rose 8% on Friday amid strong guidance that kept investors' hopes for the AI trade alive. This suggests that there are still opportunities in the sector, but they are being overshadowed by the broader uncertainties surrounding trade policy.

Tariff Uncertainty Contributes to US Dollar Volatility

The uncertainty surrounding tariffs has also had a significant impact on the US dollar. The US dollar index, which measures the dollar against a basket of other major currencies, declined more than 3% this week. This is its biggest weekly drop since November 2022 and is contrary to what markets expected. Inflationary pressure from tariffs was predicted to keep rates high and boost the currency, but headwinds to growth and questions around the "US exceptionalism" trade have caused the dollar to dip versus rivals.

The uncertainty surrounding tariffs has been further exacerbated by President Trump's announcement that reciprocal tariffs could be enacted as soon as this week or early next week. This has created additional uncertainty among investors, who are already grappling with the impact of tariffs on the economy.

Bond Market Reacts to Uncertainty

The 10-year US Treasury yield surged 20 basis points since Tuesday and is up 11 basis points for the week. This increase in yields suggests that investors are becoming increasingly risk-averse as they seek safe-haven assets. The sharp move in bond yields has been driven by a combination of factors, including the uncertainty surrounding trade policy and the potential impact on economic growth.

Economic Indicators Provide Mixed Signals

While the uncertainty surrounding trade policy has created significant volatility in markets, some economic indicators have provided mixed signals. A strong rebound in US Services PMI and a decline in initial jobless claims suggest that the economy is still growing, albeit at a slower pace than expected. However, the lukewarm February jobs report has contributed to the downside move.

Conclusion

The stock market's worst weekly decline in six months reflects the significant uncertainty surrounding trade policy and economic forecasts. The imposition of tariffs on goods from Mexico and Canada, combined with the potential for reciprocal tariffs, has created a perfect storm of uncertainty among investors. While some stocks have been affected more than others, the impact of these uncertainties can be seen across various sectors. As markets continue to grapple with the implications of trade policy, it is essential to monitor economic indicators and market trends to gauge the extent of the damage.

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