Although many analysts and market participants associate the stock market drop on April 3, 2025, with the tariff announcement, the market has been looking for an excuse to correct since at least January of this year.
The nearly 5% drop on April 3, 2025, in the S&P 500 was five standard deviations from the mean daily return based on a sample since 1945.
There have been only 31 drops larger than 5% in the period considered. Most of these drops occurred during the dot-com uptrend and subsequent downtrend, as well as during the GFC bear market.
Many analysts and market participants believe it was the tariffs that triggered the selloff. Although the claim may be true in the sense of a “proximate cause,” the market has been looking for an “excuse” to drop for several months. There were some unique technical signals that anticipated a large drop.
Essentially, then, the tariffs were an excuse for a 5-sigma sell-off. The market could have dropped just as much due to other, less serious developments, such as a negative economic report or even following a statement by a politician or Fed governor. Also note that the S&P 500 had already been trading below its 200-day average and closed below its 12-month moving average on March 31, 2025. As a result, the market was sensitive to negative information.
A 5-sigma daily drop could inflict some damage on the market’s credibility and can trigger further selling in the absence of a direct and decisive intervention from key market players, the government, and primarily the central bank.
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