Aswath Damodaran
I was boarding a plane for a trip to Latin America late in the evening on April 2nd, and as is my practice, I was checking the score on the Yankee game, when I read the tariff news announcement. Coming after a few days where the market seemed to have found its bearings (at least partially), it was clear from the initial reactions across the world that the breadth and the magnitude of the tariffs had caught most by surprise, and that a market markdown was coming.
Not surprisingly, the markets opened down on Thursday and spent the next two days in that mode, with US equity indices declining almost 10% by close of trading on Friday. Luckily for me, I was too busy on both Thursday and Friday with speaking events, since as the speaker, I did not have the luxury (or the pain) of checking markets all day long. In my second venue, which was Buenos Aires, I quipped that while Argentina was trying its best to make its way back from chaos towards stability, the rest of the world was looking a lot more like Argentina, in terms of uncertainty.
Since talk of tariffs has filled the airwaves for most of this year, you may wonder why markets reacted so strongly to the announcement on Wednesday. One reason might have been that investors and businesses were not expecting the tariff hit to be as wide and as deep as they turned out to be.
Note that while Canada and Mexico were not on the first list of tariff targets that was released, they have been targeted separately, and that the remaining countries that do not show up on this map (Russia and North Korea, for instance) are under sanctions that prevent them from trading in the first place.
Another reason for the market reaction was that the basis for the tariff estimates, which have now been widely shared, are not easily fixable, since they are not based on tariffs imposed by other countries, but on the magnitude of the trade deficit of the United States with these countries. Thus, any country with which the US runs a significant trade deficit faces a large tariff, and smaller countries are more exposed than larger ones since the trade deficit is computed on a percentage basis, from exports and imports related to that country.
Thus, the easy out, where other countries offer to reduce or even remove their tariffs may have no or little effect on the tariffs, to the extent that the trade deficit may have little to do with tariffs.
The worst hit regions of the world is Small Asia, which is Asia not counting India, China and Japan, which saw equity values in the aggregate decline by 12.61% in the last week. US equities had the biggest decline in dollar value terms, losing $5.3 trillion in value last week, a 9.24% decline in value from the Friday close on March 28, 2025. China and India have held up the best in the last week, perhaps because both countries have large enough domestic markets to sustain them through a trade war. It is also a factory that with time differences, these markets both closed before the Friday beatdown on Wall Street unfolded, and the open on Monday may give a better indication of the true reaction.
The technology sector lost the most in value last week, both in dollar terms, shedding almost $1.8 trillion (and 11.6%) in equity value, and consumer staples and utilities held up the best, dropping 2.30% and 4.40% respectively. In percentage terms, energy stocks have lost the most in value, with market capitalisations dropping by 14.2%, dragged down by declining oil prices.
Each crisis gives rise to postmortems, where investors, regulators and researchers pore over the data, often emerging with conclusions that extrapolate too much from what happened.
For investors: The lesson that many investors get out of looking at past crises is that markets come back from even the worst meltdowns, and that contrarian investing with a long time horizon always works. While that may be comforting, this lesson ignores the reality that the fact that a catastrophe did not occur in the crisis in question does not imply that the probability of it occurring was always zero. Markets assess risks in real time.
For regulators: To the extent that crises expose the weakest seams in markets and businesses, regulators often come in with fixes for those seams, mostly by dealing with the symptoms, rather than the causes. After the 2008 crisis, the conclusions were that the problems was banks behaving badly and ratings agencies that were not doing their job, both merited judgments, but the question of risk incentives that had led them on their risk taking misadventures were largely left untouched.
For researchers: With the benefit of hindsight, regulators weave stories about crises that are built around their own priors, by selectively picking up data items that support them. Thus, behavioral economists find every crisis to be an example of bubbles bursting and corrections for irrational investing, and efficient market theorists use the same crisis as an illustration of the magic of markets working.
It is worth remembering that each crisis is a sample size of one, and since each crises is different, aggregating or averaging across them can be difficult to do. Thus, the danger is that we try to learn too much from past crises rather than too little.
There are clearly stages of this crisis that have played out, but based on what we know now, here is how I see them:
After shocks: The tariff story will have after shocks, with both negatives (other countries imposing their own tariffs, and the US responding) and positives (a pause in tariffs, countries dropping tariffs). Those after shocks will create more market volatility, and if history is any guide, there is more downside than upside in the near term. In addition, the market volatility can feed itself, as levered investors are forced to close out positions and fund flows to markets reflect investor concerns and uncertainty. If you add on top of that the possibility that global investors may decide to reduce their US equity holdings, that reallocation will have price effects.
Real economy (near term): In the near term, the real economy will slow down, with the plus being that while tariff-related price increases are coming, a cooling down in the economy will dampen inflation. The likelihood of a recession has spiked in the days since the tariff announcement, and while we will have to wait for the numbers on real growth and unemployment to come in, it does look likely that real growth will be impacted negatively. The steep declines in commodity prices suggests that investors see an economic slowdown on the horizon.
Real economy (long term): Global economic growth will slow, and the US, as the world’s largest economy, will slow with it.. There are other dynamics at play including a restructuring of old economic and political alliances (Is there a point to having a G7 meeting?) and a new more challenging environment for global companies that have spent the last few decades building supply chains that stretch across the globe, and selling to consumers all over.
Each crisis gives rise to postmortems, where investors, regulators and researchers pore over the data, often emerging with conclusions that extrapolate too much from what happened.
For investors: The lesson that many investors get out of looking at past crises is that markets come back from even the worst meltdowns, and that contrarian investing with a long time horizon always works. While that may be comforting, this lesson ignores the reality that the fact that a catastrophe did not occur in the crisis in question does not imply that the probability of it occurring was always zero. Markets assess risks in real time.
For regulators: To the extent that crises expose the weakest seams in markets and businesses, regulators often come in with fixes for those seams, mostly by dealing with the symptoms, rather than the causes. After the 2008 crisis, the conclusions were that the problems was banks behaving badly and ratings agencies that were not doing their job, both merited judgments, but the question of risk incentives that had led them on their risk taking misadventures were largely left untouched.
For researchers: With the benefit of hindsight, regulators weave stories about crises that are built around their own priors, by selectively picking up data items that support them. Thus, behavioral economists find every crisis to be an example of bubbles bursting and corrections for irrational investing, and efficient market theorists use the same crisis as an illustration of the magic of markets working.
It is worth remembering that each crisis is a sample size of one, and since each crises is different, aggregating or averaging across them can be difficult to do. Thus, the danger is that we try to learn too much from past crises rather than too little.