MW Why the stock market reacted so badly to the new tariffs
By Mark Hulbert
Irrational exuberance is what made the market so vulnerable in the first place
Tariffs and an imminent trade war were shots across the market's bow Monday morning, but irrational exuberance is what made the market so vulnerable in the first place.
I say that because the weekend announcement of the tariffs couldn't reallybe the cause of the plunge at Monday's opening. They were hardly asurprise, after all.
Read: Here are all the ways Trump's tariffs could hit stocks, according to Goldman Sachs
Both before and after President Trump's election this past November, and especially since his inauguration last month, he has made it abundantly clear that he was going to impose stiff tariffs on U.S. trading partners.
Yet, throughout the last several weeks, Wall Street's gurus adopted a "what, me worry?" stance. As recently as of the close this past Friday - the day before when Trump had promised that he would announce the new tariffs - the average short-term market timer was more bullish than at almost any other time in the last two decades.
I know that Wall Street gurus suffer from myopia, but it strains credulity to think they are so shortsighted that they would be shocked on Monday morning for what they knew on Friday would happen.
That's why contrarians believe that Wall Street's exuberance is the rootcause.
Consider the average short-term market timer's recommended equity exposure (which is represented in the accompanying chart by the Hulbert Stock Newsletter Sentiment Index, or HSNSI).
As of last Friday's close, this average stood at 69.6%, which is higher than 95% of all daily readings since 2000. So even if Trump had not imposed tariffs, contrarians would have been expecting a market pullback.
So long as the mood on Wall Street remains so upbeat, the stock market will remain "an accident waiting to happen," according to Hayes Martin, president of MarketExtremes, an investment consulting firm that focuses on major market turning points.
Last week, the "accident" was the revelation that Chinese AI company DeepSeek posed an inexpensive alternative to Nvidia $(NVDA)$ and other American tech giants. And this week, it's tariffs.
Though no one can tell in advance what the next "accident" will be, the market will remain vulnerable so long as stocks remain priced to perfection.
What about market timers in other arenas?
In addition to the HSNSI, my firm also calculates three other sentiment indexes: One for the Nasdaq-focused COMP stock-market timers, a second for the gold market (GC00), and a third for the U.S. bond market. The chart below summarizes where all four of these indexes currently stand relative to their histories.
I draw your attention particularly to where my gold sentiment index stands. Relative to its history, it is currently as high as the HSNSI, propelled in large part by investors' preference for safe havens as the risk of a trade war escalates. This is another indication of Wall Street's irrational exuberance for stocks, since a rush to safe havens is not consistent with a love for equities.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert
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February 03, 2025 16:18 ET (21:18 GMT)
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