The buck stops at the Resolute Desk in the White House. President Donald Trump owns the economy and U.S. equity markets.

When Trump was elected on Nov. 5, equity markets rallied. The day after the election, the Dow Jones Industrial Average jumped 1,508 points, the biggest post-election surge in 128 years. The S&P 500 climbed 2.5%, or 146 points, to end the day at 5,929, an all-time high. Markets celebrated Trump’s victory and a clean sweep by the Republican party. Republicans remained the majority party in the House and regained control of the Senate by a comfortable three seats.

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Markets were excited about Trump’s pro-growth agenda which included lower taxes and aggressive deregulation of the administrative state. Now, however, matters are different. The economy and equity markets are in free fall. Equity markets do not like tariffs. And almost uniformly economists agree that tariffs are bad policy.

Just a few weeks ago, the S&P hit an all-time high of 6,147. On Tuesday, the index traded sharply lower. The market intraday (buying and selling of stocks on the same day) on Tuesday was down over 6% from its mid-February high. Equity markets are tanking because markets fear that Trump’s tariffs are sparking a global trade war. Trump reinforced these concerns in his address to Congress on Tuesday, showing excitement for further tariffs that he says will enter force in April.

But whatever Trump does in the coming months, the economic fear is already rational.

In February, Trump imposed 10% tariffs on Chinese imports. This week he doubled those tariffs to 20%. China responded with tariffs of 15% on a variety of U.S. farm exports. In the early hours of Tuesday, Trump imposed 25% tariffs on imports from both Canada and Mexico. In response, Canadian Prime Minister Justin Trudeau said his country would raise tariffs on over $100 billion of American goods. Mexico’s President Claudia Sheinbaum announced that her country would respond to Trump’s tariffs this Sunday. 

Trump’s tariffs are taking us back in time. Not in a good way. In 1930, Congress passed the Smoot-Hawley Tariff Act. That legislation was a significant catalyst in bringing about the Great Depression.  The Act sparked a global trade war and helped motivate extreme political movements such as Nazism in Europe. Top line: tariffs are generally bad economic policy because they are a tax on consumption. They reduce the American standard of living. They contribute to inflation. Aside from those targeting China, which is America’s foremost global enemy, there is no economically valid reason for Trump’s tariffs. If he is interested in fairer trade then he should negotiate, just as he negotiated the current free trade agreement among the United States, Mexico, and Canada. 

The president’s concerns are legitimate. But if Trump is interested in controlling the flow of fentanyl into the U.S., then he should negotiate specifically on that issue. If Trump wants to reduce the trade deficit, then he should focus on reducing the budget deficit. In large part, the budget deficit drives the trade deficit. The enormous structural budget deficit causes excess demand that domestic supply cannot satisfy.  Excess demand caused by the budget deficit sucks in imports from overseas. 

Markets, businesses, and households are unsettled by the uncertainty and chaos of the early days of the Trump administration. No one likes uncertainty. Consumer confidence is falling sharply. Recently, two of America’s largest retailers, Walmart and Target, said that consumers slowed their purchases during February.  

The data is clear, households don’t like the uncertainty caused by the Trump administration. Businesses don’t like uncertainty either. When businesses are uncertain, they freeze investment decisions. Capital investment slows.

If Trump’s policies cause a recession (which, fortunately, remains unlikely), earnings for the S&P 500 would fall sharply. The index could fall below 5,000 which would be down more than 20% from the recent all-time highs. Wealth would be destroyed for American households. Moreover, when a recession occurs, the automatic stabilizers of the U.S. economy kick in. Government spending rises, the federal deficit increases.

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Trump’s tariffs and his chaotic policy making are diametrically opposed to what he wants to achieve. He says he wants a strong economy, but his policies are giving us a weak economy. He says he wants a lower deficit, but his policies could cause a rising deficit. He says he wants strong business investment, but his policies could cause lower business investment.

Trump owns the slowing economy, and he owns the falling stock market. He also has the unique power to own the solution.

James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected].