What made the asset market crash?
Generally, it is well known that the market reflects the impacts of news events based on the Efficient Market Hypothesis (EMH). However, the recent tariff war caused the asset market to crash unexpectedly. Why did this happen? If the EMH theory is correct, the impact of the tariff war should have been reflected in prices since it was announced in advance by Trump and top officials in his government.
I believe there were several missing points that led to the severe market downturn. Even though market participants were aware of the tariff war, the realized severity was much deeper than expected. China’s unexpected tough and coordinated reaction was one of the key factors that shocked the market. China’s response was not only aggressive but also systematic, incorporating retaliatory tariffs, supply chain optimization, and plans to escape the dollar-dominated currency system. This led the market to add an additional risk premium.
When unexpected risks occur in the market, it becomes fearful and falls sharply. This market response triggers algorithmic trading and stop-loss orders to minimize asset losses, driving the market decline more sharply and deeply. When automated systems and institutional traders start selling, the public may become fearful and follow suit, amplifying the market crash.
In the case of Trump, he is very unpredictable and does not weigh much on legalized and coordinated executions. Under his administration, similar cases may happen again until the market becomes accustomed to this unpredictability.
This post is also published on Medium on April 8, 2025, by the same author.
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