Pause in the tariff war.
China and the United States have agreed to a three-month truce in their trade dispute, and the effect on financial markets has been galvanizing. You can read about the reduction in US tariffs to 30% from 145% here and here. In the long run, neither side seems to have made concessions. Essentially, they agreed to stop and talk—something generally advisable in many aspects of life. However, investors, who had been caught off guard by the swift decline into a full-blown trade war last month, welcomed the pause with strong gains. Still, data show that many who exited have not yet returned, missing out on the rally.
Source: New York Times — U.S.-China retaliatory tariffs. President Trump raised tariffs on Chinese goods multiple times this year, before temporarily lowering the rates while the two sides negotiate. China responded to the tariffs with equivalent measures, but also agreed to a pause during recent negotiations.
V-shaped recovery?
This has led to an extraordinary surge over just 20 days. The rally since April 9, when President Donald Trump announced a similar 90-day pause for countries other than China, now ranks among the largest since 1990. It has earned its place in history and formed what looks like a V-shaped recovery.
As the chart shows, the S&P 500 peaked at 6,144 on February 19, 2025, before dropping -18.9% in just a few days, nearly entering a bear market by April 8. From that low of 4,892, the index has since climbed back +18.2% by May 14.
Note: the “V” isn’t yet complete—recovering an 18.9% drop requires a gain of more than 23%, since the base is lower.
Reality and perception
One of the hardest things in times like these is to separate reality from perception. This often happens during uncertain times.
Right now, US tariffs are 10% for most countries and 30% for China. Two months ago, this would have seemed the worst-case scenario. Today, however, it’s being celebrated as a major improvement. This distorted perception has real effects on markets.
If tariffs were removed now, indices would likely exceed their recent highs—even though the underlying economy is arguably in worse shape.
Although today’s situation is better than a month ago and the market tone is more constructive, uncertainty remains. The threat of a “Sell America” scenario hasn’t disappeared.
There is no panic selling, but large asset managers are reevaluating their US exposure with more calm. A short squeeze is likely, with short-sellers forced to cover their positions rapidly.
Bull traps or dead cat bounce?
This is a good opportunity to explain a technical concept: the “bull trap.” In volatile environments, it’s important to distinguish a genuine recovery from a misleading bounce. Volume is key—rising prices with low volume may signal a trap, while gains with high volume could indicate a real trend change.
Are we in a bull trap now? It’s impossible to say for certain. But technically speaking, the volume observed in the early phase of the rebound suggests it may not be a bull trap.
Charts show an increase in volume early on, consistent with a trend change—but in later stages, volume returned to the average. Markets have shifted from “sell everything” to “don’t miss the Trump rally.” But again, nothing is guaranteed.
Note: about “dead cat bounce”. The ‘Dead Cat Bounce’ is a specific type of Bull Trap that occurs after a sharp drop in a bear market. It occurs when, after a sharp decline, the price bounces briefly before continuing its fall. This move can attract optimistic buyers who interpret the rebound as the start of a recovery, only to get caught when the price goes back down. In reality, beyond the names, they are very similar moves.
The risk of missing rebounds
As we have seen, although technically it seems that the rebound may be genuine, it is not out of the question that we are facing a bullish trap. This may be important for the speculator (or trader), but in reality it matters little to the investor.
In recent days, the S&P 500 experienced rises of 9.52% and another of 3.26%, which might seem extraordinary events. The former certainly is. But perhaps rises of 3% are. The chart we share below illustrating the evolution of the S&P 500 and its daily variations offers an interesting perspective in this regard.
Note: this chart would be very similar if we had taken the MSCI World or the ACWI (All Countries World Index). The S&P 500 has a 70% weight in the MSCI World and is often taken as a proxy due to its long history in data.
Since 2020, there have been no fewer than 18 trading sessions in which the index rose by more than 3%. In fact, missing just those 18 sessions would have meant losing out on 92% of the accumulated returns over that period. This puts into perspective how important it is to stay invested for the long term, even when the market feels volatile or uncertain.
During times of uncertainty, such as the Covid-19 pandemic or the recent “tariff war,” we’ve seen significant spikes in the daily variations of the index. Nevertheless, the long-term trend remains clearly upward. Despite two major crises (Covid-19 and Ukraine/inflation) and one scare (Tariff war), the S&P 500 has gained +80% over this period.
Although these days may cause concern, they are part of the normal evolution of financial markets. The S&P 500 has shown resilience in the face of viruses, conflicts, and political decisions that create short-term noise.
Staying invested, especially during volatile periods, is key to capturing long-term returns. Attempts to time the market can result in missing some of the most profitable days, significantly affecting overall performance.
While the outlook is more optimistic than it was weeks ago, volatility and uncertainty persist. Companies are still facing challenges in planning long-term investments due to the unpredictability of economic policies.
As always, we recommend keeping things simple. Staying calm and sticking to your plan by making regular automatic contributions is generally the best approach when facing sharp downturns or even potential bull traps.
You can complement this reading with the following posts:
The bias of the immediate and the myths that fall: do not trust what you have experienced recently
What to do and what to avoid when markets drop (2025)
What we do for you and what we recommend you do during market downturns.
