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4/11/2025
Market sentiment tumbles into “panic territory” after reciprocal tariffs announcement on “Liberation Day.”
President Trump's announcement of reciprocal tariffs on “Liberation Day” made major headlines and triggered strong market reactions. The word "panic" was often used in light of the price losses, such as those observed in global stock markets.
However, mood swings in stock markets are not uncommon. These are sometimes described using an analogy from medicine, according to which markets exhibit "manic-depressive" behavior, meaning they are either euphoric or deeply depressed.
Can panic be measured? One indicator that describes sentiment, specifically in the stock market, is the ratio of valuation to volatility. Positive sentiment increases valuations, which are represented in the numerator of our panic-euphoria Indicator. Combined with low volatility, represented in the denominator, the indicator rises. Conversely, if falling prices also cause valuations to fall and volatility increases, the Panic-Euphoria Indicator falls.
In our Chart of the Week, the sudden change in mood of the markets, illustrated by the S&P 500 Index, is particularly clear: last February, the indicator was in the euphoria zone, but after the memorable meeting in the White House Rose Garden, it fell deep into panic territory.
*Price-to-earnings ratio
** Volatility Index
Sources: Bloomberg L.P., DWS Investment GmbH as of April 08, 2025
How have markets historically performed after the Panic-Euphoria Indicator fell to similarly low levels? The examples of February 2018, December 2018, March 2020, and August 2024 were followed by a market recovery. However, the year 2022 showed us that we shouldn't blindly rely on a recovery: our panic-euphoria Indicator made its first foray into the green panic zone in March of that year, but the market didn't find its bottom until after another 15% decline.
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