Cryptocurrency traded in accordance with stocks points to troubling uncertainties about the U.S. dollar. Much has been said about how stocks and crypto assets became correlated after President Donald Trump announced his “Liberation Day” tariffs on April 2.
A closer look at the timing of the movements of these two types of assets suggests troubling uncertainties for the U.S. dollar rather than for international trade, good relations, or economic recession.
Three Phases of Market Response
- First Phase (April 2-4): Trading after market close on April 2 and movements in the following two days were driven by concerns about disruption to financial markets and international relations – bad for stocks, good for crypto.
- Second Phase (weekend to April 9): Over the weekend and until Trump’s partial reversal on April 9, investors began to fear a global recession. Stocks didn’t move significantly on Monday and Tuesday, but Bitcoin prices fell dramatically.
- Third Phase (after April 9): Since Trump’s reversal, concerns seem to be focused on the value of the U.S. dollar. Stocks and crypto have moved together much more than can be credibly explained by news.
It should be noted that it is dangerous to interpret market movements immediately after they occur. It may take months or years to understand what the markets are indicating.
Immediate Market Reaction
The initial stock reaction to the “Liberation Day” announcement was a drop of less than 1% in the first 10 minutes of after-hours trading, but the S&P 500 index fell 10.5% over the next two days. Bitcoin was rising during this time.
Aggressive tariffs suggested that Trump would move faster and stronger – even recklessly – in his overall plans including cost reduction through the Government Efficiency Department, deregulation, and immigration policy enforcement.
Weekend Change
Something changed over the weekend – Phase 2. Stocks didn’t move significantly on Monday and Tuesday, but Bitcoin prices fell dramatically. Trade wars, international tensions, and protectionism – all play into Bitcoin’s favor, but a global recession would likely damage Bitcoin as much as or more than stocks.
An important backdrop is the fragility of the global economy since it began recovering from the Covid pandemic. In the Biden years, we flirted with stagflation, and most economists predicted a recession.
After Trump’s Retreat
Since Trump’s partial reversal on higher tariffs for dozens of trading partners, stocks and crypto have moved together much more than can be credibly explained by news – Phase 3. When we’ve seen this in the past, it was usually the U.S. dollar causing the movements.
Both stocks and crypto are priced in dollars – when the dollar’s value falls, both rise, when the dollar’s value rises, both fall. It’s not about the value of dollars measured by the consumer price index, but how investors perceive holding dollars and nominal assets.
Tariffs would generally reduce the attractiveness of holding money compared to non-monetary assets. Americans can’t buy as much with their dollars, and reciprocal tariffs mean foreigners can’t buy as much with their currencies either.
Future Implications
The entire tariff issue will likely continue for several months, if not throughout the Trump administration. The temporary pause has reduced the risk of recession or major international conflict. The deeper question is Trump’s aggressiveness and willingness to listen to traditional advisors. Next time, I expect stocks to react faster and more negatively and crypto to rise. Politics, not economics, may be the main driver of financial market volatility until Trump calms down or leaves office.
