Sell-off at the opening! Trump's "tariff stick" scares away retail investors in the U.S. stock market, with record-scale selling in the first hour of trading on Tuesday

According to the Zhitong Finance APP, the new round of global trade war initiated by Donald Trump, who has returned to the White House to begin his second term as President of the United States, has at least temporarily shattered the optimistic bullish sentiment of American individual investors towards the U.S. stock market. Just after the opening bell on Tuesday, it triggered a record wave of selling by retail investors in the U.S. stock market. The trade war initiated by Trump— the largest scale of protectionism in the U.S. since the 1930s— may suppress U.S. economic growth in the short term. This is just one of the cumulative shocks faced by increasingly anxious consumers, businesses, and investors.

Investors in the U.S. stock market will face for a long time the factors that may drag down U.S. business investment under the federal workforce cuts led by Tesla CEO Elon Musk, federal government reforms, immigration restrictions, and the high uncertainty of U.S. domestic and foreign trade policies. Economists are increasingly reaching a consensus: considering all factors, the world's largest economy will face a slowdown in growth, and may even fall into the "stagflation" that the Federal Reserve is most reluctant to see.

According to statistics from Emma Wu, a global quantitative and derivatives trading strategist at JP Morgan, during the first hour of trading in the U.S. stock market, so-called retail investors withdrew about $1.2 billion from the U.S. stock market (including options and other derivatives)— the largest scale of capital outflow in that time period since JP Morgan began recording ten years ago. The scale of capital withdrawal at the individual stock level reached $1.1 billion, widely distributed across various segments of the U.S. stock market.

This massive outflow of retail funds is another example of how the uncertainty caused by Trump's policy shift has disrupted the direction of financial markets. Emma Wu stated that the bullish sentiment of retail investors had recently— even before Trump's tariff campaign— exceeded the levels seen during the meme stock frenzy of 2021. The withdrawal of retail funds led to a significant market decline, with the S&P 500 index plummeting by as much as 2%, before recovering most of its losses as some investors bet that Trump might eventually change his policies.

Jim Worden, Chief Investment Officer of Wealth Consulting Group, stated: "There is likely some profit-taking behavior, as those with lower risk tolerance may choose to wait until the uncertainties related to tariffs and U.S. economic growth are resolved."

Nevertheless, retail investors remain relatively optimistic about certain sectors, such as large technology stocks. The so-called "seven giants" of U.S. stocks, which account for as much as 40% of the S&P 500 index, only represented about 20% of the total outflow on Tuesday. The "seven giants"— namely Apple, Microsoft, Google, Tesla, NVIDIA, Amazon, and Facebook's parent company Meta Platforms— have been the core drivers of the S&P 500 index and the NASDAQ Composite index reaching new highs since 2023

Retail investors insist on "buying on dips," while institutions sell on highs

It is noteworthy that since the beginning of this year, the strategies of retail and institutional investors in the U.S. stock market have been completely opposite. For a long time, they have strictly adhered to the so-called "buying on dips" investment strategy, but this year, institutional investors have become particularly cautious about the U.S. stock market. Since the beginning of this year, retail investors in the U.S. stock market typically buy during declines, betting on a rebound in the short or medium term, while hedge funds and other institutional investors, in contrast, sell heavily during rebounds.

From historical data of the U.S. stock market, this disconnection between the two is seen as a negative indicator for market direction, as large institutions are ultimately believed to have a greater influence on market sentiment. Additionally, traders at Goldman Sachs wrote in a report to clients at the end of February that retail investor inflows have begun to weaken, partly due to news of the intensifying U.S.-led global trade war, and more importantly—concerns about the U.S. economy falling into "stagflation" have significantly increased.

Scott Colyer, CEO of Advisors Asset Management, stated: "The tariff trading model is relatively unfamiliar to most retail investors, especially those who entered the U.S. stock market during the pandemic. I believe this adds another layer of complexity to the anxiety levels of retail traders. These so-called 'washout' events always help to squeeze out some speculative bubbles."

It is noteworthy that Trump's latest threats regarding tariffs on China, Canada, Mexico, and even globally come at a time when the U.S. economy is fragile, with persistent inflation remaining one of the main concerns for Americans. Many economists have stated that higher import tariffs than ever before will further push up domestic price levels in the U.S., as businesses will attempt to continuously pass costs onto consumers. Meanwhile, the large middle and low-income groups in the U.S. are significantly reducing consumption expenditures in the face of high interest rates and persistently high inflation. Currently, U.S. consumption is merely supported by high-net-worth consumers, while consumption is the core driving force behind U.S. economic growth.

In the PCE data report released last Friday, before consumer spending cooled, pessimistic sentiment regarding stagflation had already risen recently. The CPI and PPI data for January, released in early February, both exceeded expectations, especially as U.S. consumers' long-term inflation expectations even reached the highest level in nearly 30 years. The latest inflation expectations for February released by the University of Michigan show that U.S. consumers' 5-year to 10-year inflation expectations have a final value of 3.5%, marking the largest month-on-month increase since May 2021 and the highest level since 1995. U.S. consumers are increasingly worried that Trump's tariff increases will lead to rising prices.

The U.S. composite PMI fell from 52.7 in January to 50.4, the lowest level in 17 months. More pessimistic data shows that the large service sector activity, which is crucial for the U.S. economy, has contracted for the first time in over two years, with the service sector PMI preliminary value at 49.7, entering the contraction zone, significantly lower than January's 52.9, unexpectedly setting a new low since January 2023The latest data released by the Institute for Supply Management (ISM) shows that the price paid index, which measures input prices for manufacturers, surged to 62.4, the highest level since June 2022, indicating that after the largest increase in commodity prices in January in 11 months, prices may continue to rise.

The latest Consumer Confidence Expectations Index released by the Conference Board has fallen below 80 (which usually signals a recession), largely due to concerns that Trump's tax policies will lead to significant price increases. The latest data from the Conference Board also shows that the consumer confidence index has declined for three consecutive months, dropping 7 points from January's 105.3 to 98.3, below the market's general expectation of 102.3, marking the lowest data since June 2024 and the largest monthly decline since August 2021. However, as recently reflected in the inverted U.S. Treasury yield curve, such signals are far from certain, but they are at the core of the recent significant warming expectations of "stagflation" in the U.S. economy.

Gregory Daco, chief economist at EY-Parthenon, stated, "There is a scent of stagflation in the air. Even if we are not there yet." He pointed out, "The developments, especially those in the past week, indicate that consumer sentiment is softening, spending is also softening, and concerns about inflation—at least inflation expectations—are rising."

Stagflation is arguably the most troublesome economic challenge for the Federal Reserve, as the space for interest rate cuts will be severely constrained under the backdrop of "stagflation," potentially forcing the U.S. economy into a deep recession.

Beyond Tariffs: Multiple Risks Accumulate, "Trump-style Pressure"

Although few believe there will be a comprehensive contraction this year, and measures such as tax cuts to promote growth are being advanced, the specter of "Trump-style recession" and "Trump-style stagflation" has been raised. If tariffs escalate into a tit-for-tat global trade tug-of-war, this risk will be further amplified—Trump has made it clear that after imposing tariffs on Mexico, Canada, and China, more tariffs will follow. Future targets include the European Union, as well as high-profit industries such as automobiles, pharmaceuticals, and semiconductors, along with "reciprocal" tariffs calculated by Trump's team based on various barriers to U.S. goods overseas.

This wave of tariffs comes amid clear signals of slowing growth and rising inflation in the U.S. PCE statistics show that U.S. consumer spending in January saw the largest decline in nearly four years, with consumer confidence severely weakened. Last month, manufacturing activity declined, while the input price index surged to its highest level since June 2022.

Based on econometric models used by the Federal Reserve during Trump's first term, the latest tariff shock could reduce U.S. GDP by 1.3% and increase the core inflation rate by about 0.8%, reinforcing expectations of "stagflation."Economists at Yale University's Budget Lab predict that the economic growth shock in 2025 will be about half of the aforementioned value, but warn of potential trauma lasting for years. They wrote that even after production shifts and supply chain reorganizations, the latest tariffs from Trump and retaliatory measures from other countries will still reduce long-term GDP by 0.4%—"equivalent to a permanent shrinkage of the U.S. economy by $80 billion to $110 billion each year."

The layoffs driven by the Department of Government Efficiency (DOGE) led by Elon Musk have resulted in over 100,000 federal employees losing their jobs, creating a ripple effect on numerous government business contractors. While DOGE alone may not trigger a recession, the creator of the Sahm Rule—renowned economist Claudia Sahm—points out that it "amplifies recession risks in two key ways through rapid action and breaking norms": first, by concentrating the economic impact entirely in the short term, and second, by creating uncertainty that could suppress growth and employment. She emphasizes that the backdrop to all this is a slowdown in growth, high interest rates, and the snowball effect of tariffs.

Trump acknowledged that Americans might feel "some pain" from the tariff battles but claimed that the long-term benefits of his agenda would be substantial. The Trump administration stated that tariffs, deregulation, and tax cuts being pushed through Congress would collectively drive investment prosperity.

To prove that its hawkish tariff policy is effective, the Trump team mentioned that TSMC (the world's largest semiconductor foundry) recently committed to investing an additional $100 billion in U.S. manufacturing. Another key aspect of the policy mix is cheap energy. There are signs that Trump has persuaded Saudi Arabia and Russia to increase production—this could lower oil prices and provide relief to American consumers affected by tariffs.

The U.S. economy has repeatedly demonstrated its resilience and defied recession predictions. However, Stephanie Roth, chief economist at Wolfe Research, believes that the so-called "Trump-style pressure" is accumulating and continuously impacting the U.S. economy. "If you were to design something truly detrimental to the economy, this is what you would need."