Over the past two weeks, market activity has been intense, characterized by heightened volatility and the establishment of new trading records. This report endeavors to encapsulate recent developments and how the market dynamics diverge from typical trends.
Impact of Tariff Announcements on Stocks and Bonds
Before the conclusion of the first quarter, the U.S. market experienced a decline fueled by apprehensions regarding the impact of new tariffs on U.S. imports, production costs, and broader economic implications. Following the market’s closure on Wednesday, April 2, President Trump unveiled the anticipated “reciprocal tariffs.” These tariffs, surpassing initial expectations, affected virtually every trading partner of the U.S., causing a market shock.
One week later, stocks experienced a surge after the announcement that these tariffs would be deferred by 90 days. This led to the Nasdaq Composite index increasing by over 12%, marking its second-best performance in history. Not only stocks but U.S. 10-year Treasuries were also affected, with their sell-off raising yields from below 3.9% to nearly 4.6%, equating to a rise of approximately 66 basis points within slightly over a week. Such behavior is atypical in a risk-off market, prompting speculation among experts about the sudden skepticism toward Treasuries.
Volatility and Its Implications
The VIX index, a measure of implied volatility, spiked as market sell-offs and uncertainty intensified. Although there have been significant spikes since the VIX’s inception in 1992, the recent closing high of 52.3 is not a record.
The increase in volatility has historically been associated with higher stock spreads and trading costs, driven by market makers’ increased risk due to adverse selections. Data indicates that bid-ask spreads have escalated significantly in recent weeks, nearing record levels since 2017. Furthermore, S&P 500 spreads had been rising even prior to the VIX spike, showing a consistent uptrend commencing in 2024.
Soaring Trading and Options Volumes
Trading volumes soared alongside market activity, with nine of the ten highest volume days on record occurring since the U.S. election. On April 9, nearly 31 billion shares were traded, exceeding double last year’s average. Typically, fast-moving markets witness reduced traders engaging at the closing bell. During the past week, Market On Close (MOC) volumes fell below 5% of total daily volumes, deviating from the usual near 6%.
Options trading volumes also set a new record, with 101.9 million contracts traded on April 4, 2025, two days post the announcement of retaliatory tariffs. The put-call ratio escalated rapidly, highlighting an increased focus on put options, which provide investors downside protection.
Retail Traders and Market Fluctuations
Retail traders, who had been largely buying stocks in 2025, showed significant net selling after the reciprocal tariff announcement. This activity included days of considerable sector-wide selling, somewhat mitigated by substantial dip-buying activity.
Market Protections Amid Volatility
Market volatility is not unfamiliar, and several safeguards exist to manage sell-offs. These include:
Market Wide Circuit Breakers (MWCB): These halt all trading temporarily when the market declines substantially, affording buyers an opportunity to process and respond to the news.
Limit Up/Limit Down (LULD) Mechanisms: These curtail individual stock volatility by placing limits on price movement and halting trading if necessary.
Clearly Erroneous (CE) Rules: Designed to nullify obvious trading errors, these rules rarely apply due to existing LULD bands.
- Short-Selling Rules: Applied to stocks that have fallen significantly in a day, they ensure that short selling doesn’t excessively pressure prices downward.
Future Market Uncertainties
Although volatility has tapered since the 90-day tariff extension, the final details of tariffs remain unresolved, indicating potential continued uncertainty and periodic trading surges throughout 2025.
