"Federal Reserve Interest Rate Decision Day" is no longer the main event; Trump's tariff concerns have become the new focus of the US stock market

The current U.S. stock market is no longer completely influenced by the Federal Reserve. For many years, as the Federal Reserve worked hard to curb runaway inflation, its policy meetings have been the main event on Wall Street. Traders carefully scrutinized the wording of each interest rate statement, the trends in the dot plot, and the remarks made by Federal Reserve Chairman Jerome Powell at post-meeting press conferences; portfolio managers weighed how to position themselves in the market based on these new guidelines.

According to the Zhitong Finance APP, as the Federal Reserve begins its latest two-day meeting, market focus has shifted. High interest rates are no longer the primary concern for the market; investors are now more worried about slowing economic growth and the trade chaos triggered by President Donald Trump's tariffs.

Last week, these factors briefly pushed the S&P 500 index into correction territory. Although the Federal Reserve remains a focal point for the U.S. stock market, Wall Street now hopes to hear Powell's interpretation of the economy and how the Federal Reserve plans to remain flexible in the face of economic slowdown.

Jeff Blazek, Co-Chief Investment Officer of Multi-Asset Strategies at Neuberger Berman, stated, "We have moved past the era of closely monitoring Federal Reserve policy. Certainly, we should be aware of the risks of rising inflation, but we are more concerned about the impact of rising prices due to tariffs and potential demand destruction on economic growth."

For instance, last week, the Consumer Price Index and Producer Price Index indicated a cooling of inflation, a piece of news that barely stirred the stock market, which was busy dealing with tariff news. Meanwhile, concerns about economic growth are very real: a basket of stocks tracked by Goldman Sachs that perform well during stagflation has risen 14% over the past month, while the S&P 500 index has fallen more than 7% during the same period.

Data from Stuart Kaiser, Head of U.S. Equity Trading Strategy at Citigroup, shows that options market traders expect the S&P 500 index to experience a volatility of 1.2% on Wednesday when the Federal Reserve announces its interest rate decision and Powell holds a press conference, regardless of whether it rises or falls. This is higher than the average volatility of 0.8% on Federal Reserve meeting days over the past year. However, since traders believe that a rate cut is nearly impossible at this meeting, market volatility is likely to depend on Powell and his colleagues' statements regarding the economic situation and future risks.

Tariff-Induced Turbulence

Notably, the Trump administration is set to impose broad reciprocal tariffs and additional industry-specific tariffs on imported goods starting April 2, which has traders worried. The indicator measuring the implied price volatility of the S&P 500 index over the next 30 days is currently higher than the expected volatility two months from now, indicating that traders anticipate increased market volatility in the short term.

Michael Rosner, a Private Wealth Advisor at Raymond James, stated, "The market is so volatile that investors are very nervous. One moment there’s news about Tariff X, and within a day or even an hour, news about Tariff Y emerges. So everyone is trying to find investment direction, but it feels like information is pouring in like a fire hose, making it overwhelming."

The market's sensitivity highlights that the Federal Reserve is no longer the biggest concern for investors. On Wednesday, the 25% tariffs on steel and aluminum imports officially took effect, prompting a warning from electric vehicle giant Tesla, led by Elon Musk (a core member of the Trump administration), that these tariffs and any resulting retaliatory measures could raise manufacturing costs Weaken its competitiveness in the international automotive market.

But that's not all. Trump threatened to double the metal tariffs on Canada to 50%, but retracted the order after Ontario agreed to cancel the planned surcharge on electricity exports to the U.S. He also threatened that if the European Union imposed tariffs on U.S. whiskey exports (which itself is a retaliation against U.S. steel and aluminum tariffs), the U.S. would impose a 200% tariff on European wine, champagne, and other alcoholic beverages.

As a result, the stock market has been thrown into turmoil. Last week, the S&P 500 index experienced daily fluctuations of at least 1.2%.

Rossner from Raymond James Financial Group pointed out, "Currently, what can truly reassure investors is a certain degree of certainty in tariff policies. Even bad news is acceptable, as long as there is a clear direction."

Economic Cracks Emerge

Meanwhile, economic data continues to reveal problems. Small business confidence continues to decline, consumer confidence has sharply dropped, factory activity is gradually stagnating, and retail data shows that U.S. consumer spending is becoming increasingly cautious. Last week, numerous airlines and retailers issued warnings about weak demand. As a result, investor confidence continues to deteriorate. The latest survey from the American Association of Individual Investors shows that pessimism is rapidly rising, with optimism remaining below 20% for three consecutive weeks, marking the first occurrence of this since April 2022.

Investors are beginning to realize that the White House may not come to the rescue. Trump campaigned on an agenda that Wall Street believed would benefit economic growth, but now he warns that the U.S. economy is facing a "transitional period." He also stated that the stock market's performance is not his concern, shattering investors' hopes that a stock market sell-off would prompt him to change policy direction.

Data from Deutsche Bank shows that last week, overall U.S. stock holdings continued to decrease, falling to the lowest level in 16 months. Strategist Parag Sathe expects this reduction to continue and points out that if holdings drop to the levels seen during the last trade war, the S&P 500 index could fall to 5,250 points, a decline of about 7.5% from Monday's closing price.

Despite the bleak outlook, there are still profit opportunities in U.S. stocks, although they may not be in the popular sectors of the past few years. Despite increased market volatility, Rossner remains optimistic, overweighting stocks and focusing on healthcare, industrials, and high-dividend sectors.

Blazek from Neuberger Berman holds a neutral stance on stocks, noting that trade-related turmoil and overvaluation (especially in tech stocks) are the main reasons. However, after the S&P 500 index pulled back 10% from its historical high last week, Neuberger Berman still sees investment opportunities outside the top seven stocks by market capitalization in the benchmark index.

Blazek is not the only one feeling concerned. Several market strategists, including Goldman Sachs strategists and well-known bull Ed Yardeni, have lowered their expectations for the S&P 500 index. The reasons they provided are not related to interest rates, but rather concerns about the risks that Trump's trade policies pose to economic growth.

Mark Malek, Chief Investment Officer at Sibert Financial, stated, "The market's reaction to these uncertainties is becoming increasingly evident. Currently, the Federal Reserve's role is to maintain stability and act as a 'stabilizing force.'"