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Title: US Stock Market Faces Rising Risk of 'Waterfall' Decline Amid Tariff Hikes, Warns Jefferies’ Chris Wood
The US stock market is increasingly vulnerable to a sharp "waterfall" decline, warns Christopher Wood, global head of equity strategy at Jefferies. Wood’s recent analysis highlights that the risk is no longer confined to stretched valuations but extends to a panic-driven unwinding of passive investments, where investors hold highly concentrated positions in the same stocks.
A "waterfall" decline refers to a rapid, steep fall in stock prices triggered by widespread selling. Unlike a gradual market correction, this type of sell-off is characterized by panic and contagion, intensifying losses across sectors and markets in a cascading fashion.
This scenario is particularly concerning in today’s environment due to the dominance of passive investment strategies, like index funds and ETFs, which have led many investors to own the same basket of stocks. Should confidence falter, the forced liquidation of these positions could accelerate the market downturn[1][2][3].
A key catalyst identified by Wood is the recent imposition of tariffs by the US government, announced on April 2, 2025. Contrary to President Donald Trump’s characterization of the move as a "liberation," Wood sees this as an "impoverishment" day, reminiscent of the damaging Smoot-Hawley Tariff Act of 1930, which is widely blamed for deepening the Great Depression.
The tariffs spooked investors worldwide, causing Wall Street to record its worst day since 2020 shortly after the announcement. On that day, the Dow Jones Industrial Average plunged 1,700 points and officially entered correction territory with a decline of more than 10% from recent highs. The S&P 500 and Nasdaq also fell sharply by 5% and 6%, respectively[1][2][3].
Fitch Ratings analysts have echoed this gloomy outlook, warning that these tariffs have heightened the risk of a US recession and constrained the Federal Reserve’s ability to lower interest rates further[3].
Another worrying sign Wood highlights is the unexpected weakening of the US dollar, which defies typical expectations during times of economic uncertainty and policy tightening. Traditionally, the dollar strengthens as investors seek safe-haven assets amid market turmoil.
Wood also notes a critical policy gap in the current administration. The absence of a strong economic voice to moderate extreme trade policies—previously played by Treasury Secretary Steven Mnuchin in President Trump’s first term—leaves the market exposed. The impending departure of Elon Musk from government advisory roles in late May further exacerbates this vacuum[1][2].
The concentration of passive investments in a narrow set of high-profile stocks magnifies systemic risk. If confidence breaks, mass sell-offs could prompt a vicious cycle of falling prices and forced liquidations, contributing to the waterfall decline Wood predicts.
Economic strategists argue that if the US economy slows and slips into recession, resulting in a weaker dollar and lower oil prices, emerging markets like India could outperform. This would be driven by:
Market experts recommend a cautious and diversified investment approach:
As economic policies unfold and global trade tensions simmer, the US stock market's trajectory remains uncertain. The warnings from Chris Wood and Jefferies underscore the importance of vigilance and strategic portfolio management in navigating a potentially turbulent period for global equities.
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Published on April 18, 2025
