Inflation, Tariffs, and the New Volatility

Every crash episode before this one was triggered by something breaking in the financial system — Lehman Brothers collapsing, the dot-com bubble popping, a global pandemic shuttering the economy. The four crash days in this episode share a different origin: they were caused by deliberate government actions. The Fed chose to crush inflation. The White House chose to impose tariffs. The market crashed not because of what went wrong, but because of what policymakers did on purpose.

The 2022 bear market ground lower for ten months, producing just two qualifying days amid a steady procession of −2% and −3% declines. The 2025 tariff shock was the opposite — two devastating days in a row, followed by one of the greatest single-day rallies in history when the policy was partially reversed. Together, these four days represent the most recent chapter in the long history of −4% declines — and perhaps the beginning of a new kind of market crash.

The S&P 500 entered 2022 at 4,796.56 — an all-time high. Inflation was already at 7% and accelerating. The Federal Reserve had spent most of 2021 calling price increases “transitory.” By January 2022, that word had been retired. The Fed pivoted to the most aggressive rate-hiking cycle since Paul Volcker in the early 1980s: seven consecutive hikes through the year, including four 75-basis-point increases — a size not seen since 1994.

The bear market that followed was a grinding affair. From the January 3 peak to the October 12 trough of 3,577.03, the S&P 500 fell 25.4%. But unlike 2008 or 2020, there were no single days of spectacular panic. The entire ten-month decline produced only two days worse than −4% — the fewest of any bear market in this series. What made it painful was the relentlessness: five separate −3% days that came just short of the threshold, erasing every relief rally before it could take hold.

May 18, 2022 — down 4.04% to 3,923.68. The proximate cause was Target Corporation. The retailer reported first-quarter earnings that morning and revealed that inflation and supply-chain costs had obliterated its profit margins. Operating income fell 43%. The stock plunged 24.9% in a single session — its worst day since the 1987 crash. Walmart had delivered a similar warning the day before, falling 11.4%.

The Target disaster mattered beyond retail because it answered a question the market had been debating for months: Can companies pass inflation on to consumers, or will it crush their margins? Target’s answer was unambiguous. Freight costs were up. Inventory was bloated. Consumers were trading down. If America’s most competent retailers couldn’t manage 8% inflation, who could?

Of 7,538 stocks tracked, 6,302 declined (83.6%), with a median return of −2.57%. The selling was concentrated in consumer discretionary and retail stocks, but the contagion spread as investors recalculated margin assumptions across every sector.

September 13, 2022 — down 4.32% to 3,932.69. The Bureau of Labor Statistics released the August Consumer Price Index at 8:30 a.m., and the market reaction was instant and brutal. Headline CPI came in at 8.3% year-over-year — above the 8.1% consensus. But the real shock was core CPI, which strips out food and energy: it accelerated to 6.3% from 5.9%, the opposite of the deceleration investors had been expecting.

The market had rallied 17% from its June low through mid-August on a narrative that inflation had peaked. The August CPI report destroyed that narrative in a single data point. If core inflation was still accelerating, the Fed would have to keep hiking — higher for longer. The S&P opened down 2% and never stopped falling.

Of 7,683 stocks tracked, 6,705 declined (87.3%), with a median return of −3.06%. Technology stocks bore the heaviest damage as higher interest rates crush the present value of future earnings: NVIDIA fell 9.45%, Meta fell 9.37%, AMD fell 8.99%, MongoDB fell 9.55%. Carvana, already on the brink, plunged 12.94%. The September CPI shock was the beginning of the final leg down — the S&P would not find its bottom until October 12 at 3,577.03.

The S&P 500 had reached a fresh all-time high of 6,144.14 on February 19, 2025 — almost exactly five years after the pre-COVID peak. The economy was growing. Inflation had moderated to 2.8%. The labor market was solid. Then, on the evening of April 2, President Trump stepped to a podium in the Rose Garden and announced what he called “Liberation Day” — sweeping reciprocal tariffs on virtually every trading partner.

The tariff rates were far more aggressive than anyone had expected. A 34% tariff on China (on top of existing duties, bringing the effective rate to over 50%). A 20% tariff on the European Union. A 24% tariff on Japan. A 25% tariff on South Korea. The formula was simple and blunt: take the bilateral trade deficit, express it as a percentage of imports, and that becomes the tariff rate. No negotiations, no phase-in, no exemptions.

The announcement came after the close on April 2 — a day the S&P had risen 0.67%. Futures plunged overnight. What followed was the worst two-day stretch for the S&P 500 since March 2020.

April 3, 2025 — down 4.84% to 5,396.51. The first day of reckoning. The market opened sharply lower and sold off throughout the session as investors digested the scope of the tariffs. Companies most exposed to Asian supply chains were devastated: Five Below, which sources heavily from China and Vietnam, fell 27.81%. SharkNinja, the appliance maker, fell 21.42%. Dell fell 18.99%. Shopify fell 18.24%. Best Buy fell 17.83%. The message was clear: any company that imports goods was facing an immediate, massive cost increase.

Of 9,628 stocks tracked, 7,889 declined (81.9%), with a median return of −3.61%. But the damage was disproportionately concentrated in companies with international supply chains. Domestic-focused businesses were hit less severely, creating an unusual pattern: this was not a panic selloff but a recalculation of the global trade regime.

April 4, 2025 — down 5.97% to 5,074.09. The second day was worse. China announced retaliatory tariffs of 34% on all U.S. goods. The trade war was no longer theoretical. Semiconductor stocks, which depend on global supply chains spanning Taiwan, South Korea, and China, were crushed. Energy stocks fell as oil prices plunged on fears of a global recession. Of 9,664 stocks tracked, 8,334 declined (86.2%), with a median return of −4.65% — meaning the typical stock lost nearly 5% in a single day.

The combined two-day loss was −10.5%. The S&P continued falling through April 7 and 8, reaching a low of 4,982.78 on April 8 — down 18.9% from its February peak. The market was one bad day away from an official bear market.

On the morning of April 9, with the S&P in freefall and bond markets showing signs of stress, President Trump announced a 90-day pause on most reciprocal tariffs — reducing the rates on all countries except China to a 10% baseline. The tariffs on China, however, were raised to 145%.

The market exploded upward. The S&P 500 surged 9.51% — its best single day since October 2008. The rally erased the previous two days of losses and then some. It was the third-best day in the S&P 500 since 1946, behind only March 24, 2020 (+9.38% — wait, +9.51% actually exceeds that) and October 13, 2008 (+11.58%).

Once again, the pattern of this series held: the best days live inside the worst weeks. You could not have captured the +9.51% rally on April 9 unless you had endured the −4.84% and −5.97% crashes on April 3 and 4. By mid-May, the S&P had climbed back above 5,900. By July, it had set a new all-time high above 6,198.

The hotter-than-expected CPI crushed growth and technology stocks, whose valuations are most sensitive to interest rate expectations. The hardest-hit large caps were companies priced on future earnings that became less valuable as the discount rate climbed:

The tariff crash created a different casualty profile than any previous episode in this series. Instead of financials, energy, or cyclicals, the worst-hit stocks were importers — companies whose business models depend on manufacturing goods abroad and selling them in the United States: