With tariff uncertainty expected to loom over markets for the foreseeable future, here are four questions traders should ask to navigate the volatility, according to Nicholas Colas, co-founder of DataTrek Research. Wall Street has had a rocky start to the week. Stocks tumbled Monday as investors reacted to tariffs of 25% levied against Mexico and Canada, in addition to a 10% levy on goods imported from China. By midday, however, stocks recouped most of their losses after the U.S. said it would pause tariffs on Mexico for a month. This was quickly followed by a similar delay on Canada . On Tuesday, the major averages rose, staging a comeback after the prior day’s losses. The Nasdaq Composite , the tech-heavy index hardest hit the day prior, led the pack, rising 1.4%. The Dow Jones Industrial Average was ended higher by 134 points, or 0.3%, while the S & P 500 gained 0.7%. Wall Street’s fear gauge — the CBOE Volatility Index — was last around 17, after topping 20 at one point on Monday. A reading above 20 indicates an elevated level of volatility in stocks. .VIX 1D mountain CBOE Volatility Index The speedy recovery suggests many investors remain confident in the bull case for stocks, so long as President Donald Trump continues to utilize tariffs as a negotiating tool rather than the start of a full-blown trade war. But wary investors can keep in mind a “4-point playbook” before they start to worry about the equity market, according to DataTrek Research’s Colas. “This 4-point Playbook suggests that investors are largely seeing through worrisome trade war headlines, which is entirely understandable,” he wrote. “President Trump used tariffs as a policy tool in his first term and campaigned on them in 2024. His actions now are therefore not a real surprise.” “As long as trade wars do not trigger our Playbook, we will remain bullish on US stocks,” Colas added. 1. Is the economy at risk of a recession? It’s too soon to give up on the U.S. economy given its current strength, according to Colas. He highlighted the strong gross domestic product (GDP), which was up 2.3% in the fourth quarter, as well as a strong labor market, given that the unemployment rate is running at 4.1%. At the same time, oil prices have remained the same on the year. “While a prolonged, multi-front trade war could certainly cause a US recession and significant stock market losses, it is way too early to give up on the American economy,” Colas wrote. “Even if tariffs on Canadian crude eventually happen, it is very unlikely that oil prices double in a year, the typical catalyst for a US recession.” 2. Is the financial system stable? Even if the U.S. economy goes into a recession, investors should keep in mind the banking system, which Colas said remains on “solid ground.” 3. Will policymakers respond to trouble? There are three possible responses from policymakers: timely, slow, or no reaction at all, according to Colas. Historically, the Federal Reserve has stepped in quickly to smooth over any threats to financial stability, such as when then-Fed Chair Alan Greenspan stepped in after the stock market crash of 1987. Colas listed the American Recovery and Reinvestment Act of 2009 as an example of a slow reaction from Washington. This fiscal stimulus measure, which did not pass until February 2009, came too late to prevent the bear market that resulted from the 2008 Financial Crisis. “Today we have a rare case where policymaking is the catalyst, which is both good and bad news,” Colas wrote. “On the plus side, the Trump administration has no incentive to cause a recession. On the downside, markets dislike uncertainty and unpredictable trade policy certainly fits that description.” 4. How does the market respond? The stock market will have to respond far more severely before investors should get worried, such as with a move of greater than 1% in the S & P 500, and with a sustained move higher in the VIX, according to Colas. “Over the last 10 years, the standard deviation of daily S & P 500 price returns has been 1.1 percent,” Colas said. “Simply put, that means that any daily move of less than 1 percent is entirely normal and says markets were not entirely surprised by whatever has just happened.”
