The United States and China have reached a temporary agreement to cut tariffs, pressing the pause button on the trade war for 90 days. On Monday, May 12th, the three major stock indexes on Wall Street surged significantly, with the S&P 500 reaching its highest level since early March.
The S&P 500, Nasdaq, and Dow Jones all saw their largest single-day percentage gains since April 9th on Monday, with the S&P 500 breaking above its 200-day moving average for the first time since late March.
The Dow Jones Industrial Average soared 1,160.72 points, or 2.81%, to 42,410.10 points, marking its highest closing level since March 26th. The S&P 500 rose by 184.28 points, or 3.26%, to 5,844.19 points, reaching its highest closing level since March 3rd. The Nasdaq Composite Index climbed 779.43 points, or 4.35%, to 18,708.34 points, entering bull market territory for the first time since February 28th.
The closing price of the Nasdaq Index was more than 22% higher than its lowest closing price during the tariff sell-off in April but still nearly 8% lower than its historical closing price on December 16th.
The “fear index” on Wall Street, the Chicago Board Options Exchange Volatility Index (VIX), which hit a peak of 60 in April due to tariff concerns, fell below 20 for the first time since late March on Monday.
Among the 11 sectors in the S&P, the defensive utilities sector was the only one to close lower by 0.68%. The most robust sectors were non-essential consumer goods, which rose by 5.66%, and the technology sector, which rose by 4.66%. Apple’s stock price jumped by 6.3%.
Confidence in the avoidance of a recession in the United States has surged, with traders now expecting the Federal Reserve to cut interest rates only twice in 2025.
On Monday, the U.S. and China announced that they would mutually reduce high tariffs within 90 days. The U.S. stated that it would lower tariffs on Chinese imports from 145% to 30%, while Beijing announced a reduction in tariffs on U.S. imports from 125% to 10%.
Investors found some relief in the outlook for the trade war, favoring higher-risk assets and abandoning defensive bets. However, they are still waiting for clarification on how the tariffs will ultimately be settled.
According to Bloomberg, Mark Dowding, Chief Investment Officer at BlueBay Fixed Income, said, “People are unwinding some of the trades they had on recession. It all makes sense because people had legitimate concerns about a possible cliff-edge event, with a severe impact on the U.S. economy and trade suddenly stagnating. Those worries have now been deferred.”
At the same time, safe-haven assets such as gold, the Japanese yen, and the Swiss franc declined simultaneously. The euro fell, poised to have its worst day of the year.
Some investors expressed concerns about the lack of details in Monday’s announcement and the risk of renewed trade tensions between the U.S. and China. While the two countries have three months to resolve their differences, this period may not be sufficient for a complex trade dispute. It is also unclear what the end goal will be when the cooling-off period expires.
When asked about measures to prevent a tariff escalation once the 90-day agreement ends, U.S. Treasury Secretary Scott Bennett suggested the possibility of extending the truce further.
President Trump, however, indicated that if an agreement is not reached within 90 days, tariffs will be raised, but not to the previous peak of 145%.
Meanwhile, Chinese exporters may use this time to increase exports to the U.S. or other countries, exacerbating trade imbalances.
Roberto Scholtes, Chief Strategist at Singular Bank, warned that the U.S. stock market is unlikely to return to historic highs in the short-term. He cautioned that even with an agreement, businesses could suffer economic losses due to uncertainties in U.S. economic policies.
“We’ve seized the opportunity to buy on the dip,” he said. “We are currently in a wait-and-see mode, evaluating whether to sell on the high.”
Trade pressures have begun to impact businesses, with companies like UPS Inc., Ford Motor Company, and Mattel Inc. withdrawing their earnings guidance, citing increasing difficulties in managing tariff uncertainties.