Is the ASX 200 on the brink of a bear market?

The S&P/ASX 200 tumbled 2.07% in early trade on Thursday after President Donald Trump announced a swathe of reciprocal tariffs, raising fears of a global trade war, inflation resurgence and a potential US recession.

Below, we break down the key takeaways from Trump’s “Liberation Day” tariff announcement and unpack the equity markets’ sharp reactions.

"Liberation Day"

Markets briefly surged after the Wall Street Journal reported a 10% baseline tariff on all US imports. S&P 500 futures spiked 1.3% between 7:11 and 7:16 a.m. AEDT, as investors assumed this cap applied universally to reciprocal tariffs.

At 7:26 am AEDT, Trump revealed a "Reciprocal Tariffs" poster on stage at his announcement. It highlighted tariffs including 34% for China, 20% for the European Union and 46% for Vietnam. By 9:20 a.m. AEDT, futures had cratered 5.0% from their fleeting peak just two hours earlier.

S&P 500 futures intraday chart (Source: TradingView)

Trump explained that the tariffs will be imposed at half of the rate of what countries are currently charging the US. For example, if you tariff the US at 20%, the US will tariff you at 10%.

The White House posted a full list of tariffs on X, targeting 185 countries, including countries you've probably never heard of, like a 10% tariff on the Heard and McDonald Islands.

Economic Fallout: Pain Before Gain?

James Knightley, Chief International Economist at ING, cautioned, “these measures might benefit the U.S. economy in the long run, but the transition will hurt.” He noted the tariffs, totaling roughly $600 billion, aim to boost US manufacturing and raise tax revenue. Yet the immediate pain seems inevitable as reshoring production faces steep hurdles. Key insights from his analysis include:

• High US Wages: Manufacturing workers in the U.S. earned an average of $102,629 (including benefits) in 2023, per the National Association of Manufacturers. In contrast, wages in China, Korea, and Germany are about 25%, 40%, and 75% of that level, respectively.

• Reshoring Reality Check: High labor costs mean only highly automated, skilled, or premium “Made in America” products justify bringing production stateside.

• Cost Absorption Squeeze: Relocation expenses may force companies to keep production overseas, swallowing tariffs into operating costs while hoping for a softer administration stance later.

• Who Pays?: Trump insists foreign producers will foot the bill, bolstered by a strong dollar. But with the dollar weakening, U.S. importers face higher costs unless foreign prices drop or the dollar rebounds fast — otherwise, slimmer margins or pricier goods hit consumers.

• “Made in America” Limits: Replacing $3.3 trillion in 2024 imports with domestic output would require doubling U.S. manufacturing, currently valued at just under $3 trillion. That’s a long-term dream, not a near-term fix, ensuring supply chain price hikes.

In a worst-case scenario — that being, no U.S.-made alternatives and full tariff pass-through — U.S. prices could climb 3.3%, ballooning 2024 consumer spending from $19.83 trillion to $20.49 trillion. That’s an extra $600 billion, or 2.7% of the $22 trillion household disposable income — equal to approximately $1,800 per American.

Past precedent, like the 2018 washing machine tariff (20%, with 60% passed to consumers), suggests broader tariffs could see 75% passed through, lifting prices 2.5%, or $1,350 per person.

Tariffs also hit harder at the bottom. Lower-income households, reliant on tariffed goods like food and clothing, feel the pinch more than wealthier ones that spend on un-taxed services like travel. The top 20% (earning $200k+) ride rising asset values and low debt, while the bottom 60% (earning $90k or less) grapple with renting (38% of households), scarce assets, and crushing borrowing costs.

The bottom line is things could get ugly and Trump has invested too much in tariffs, and needs them to give him fiscal room to drive tax cuts.

ASX 200 Dips but Holds Steady

The ASX 200 dipped 2% in early trade on Thursday, yet given the tariff shock, it’s weathered the storm better than expected.

Surprisingly, the market has yet to undercut its 13 March low, while S&P 500 futures (currently down 3.5%) imply it will open at a fresh eight-month low tonight.

"It's surprising stocks are not down even more," said Neil Dutta of Renaissance Macro Research, adding that "perhaps investors assume cooler heads prevail later. I would not hold your breath."

ASX 200 daily chart (Source: TradingView)

From a sector perspective, all sectors are down except for Consumer Staples.

The sector is trading around breakeven, with Woolworths and Coles trading 0.4% and 0.8% higher, respectively.

Most heavyweight names such as Commonwealth Bank, Macquarie, BHP, Woodside and CSL are down 1-3%.

ASX stocks and sector performance as at 10:30 am AEDT (Source: TradingView)

Where does the market go from here?

More broadly speaking, market dips and corrections are often buying opportunities for medium-to-long term investors — unless the economy falls into a recession.

Last year, I examined how the market performed during major conflicts such as the Russian Invasion of Ukraine and the Israel-Hamas war. The historical data was rather telling.

If the economy did not fall into a recession during these conflicts, the forward returns were positive across a week, a month, three months, six months and a year. But if the event was recessionary, forward returns flipped negative across all the above time frames.

Trump’s tariffs amplify global recession risks. Goldman Sachs last week hiked its 12-month U.S. recession odds from 20% to 35%, citing plunging confidence and weaker GDP forecasts. AMP Chief Economist Shane Oliver pegs the U.S. recession risk at “around 40%,” with global growth potentially slipping to 2% from 3%, depending on retaliation and stimulus from nations like China.

“We expect a 15%+ correction from this year’s high,” he said. To add some perspective, the ASX 200 is currently down 9.6% from its February 14 peak.

"A 10% fall in US shares was not enough to put pressure on Trump but a 15% plus fall likely will at some point resulting in some moderation in the tariffs and refocus on the market positive aspects of his agenda (like tax cuts and de-regulation)," he added.

"And eventually the Fed will likely respond with rate cuts, although this may be delayed given US tariffs will also add to US inflation."

When the dust settles, he expects this will create buying opportunities, but "there may be a way to go yet."