Schwab: Trump’s tariffs have turned retail investors bearish

President Trump’s erratic approach to tariffs has sent markets into a tailspin, fueling a broad sell-off across major U.S. indices over the past month. And individual investors aren’t feeling any better about it.

According to the Schwab Trading Activity Index (STAX) — which tracks sentiment based on the trades of Schwab self-directed clients — individual investors are turning increasingly bearish.

Many investors greeted Trump’s return to the White House with a certain sense of “euphoria,” remaining bullish on his promise of deregulation and tax cuts. However, a month after he took office, investor confidence began to waver.

"Sentiment started to sour toward the end of the month, but some of the optimism we saw from late January carried through into early February," said Joe Mazzola, head of trading and derivatives strategy at Schwab.

February started strong as Schwab’s retail clients poured money into information technology, communication services, and consumer discretionary stocks after Trump’s delays in imposing tariffs on Mexico and Canada.

However, Schwab notes, the “mood changed quickly around February 21, and things got tougher for investors from there.” "As February continued, clients shifted from looking at positive earnings to reacting to negative data flow and pulled back on buying,” Mazzola said.

Looking for a refuge, individual investors moved away from the Magnificent 7 stocks and fled to more defensive sectors like materials and financials, according to Schwab data.

While stock purchases rose last month compared to a month before, they were primarily driven by "de-risking" moves, according to Schwab.

“STAX rose in February, but the majority of buying occurred earlier in the month as the de-risking we saw earlier this year gave investors the ability to start buying some of the dips," Mazzola said.

The sentiment shifted due to a run of bad news, including Trump’s renewed tariff threats, geopolitical uncertainty, and a surprisingly sharp spike in U.S. weekly jobless claims.

In contrast to moody individual investors, Wall Street is growing cautiously optimistic. Morgan Stanley CIO and chief U.S. equity strategist Mike Wilson expects the markets to launch into another rally.

According to Wilson, who spoke on Morgan Stanley’s “Thoughts on the Market” podcast this week, a dip to 5,500 by the S&P 500 “should provide support for a tradable rally, led by lower-quality, higher-beta stocks that have sold off the most.”

However, the question is “whether such a rally would extend into something more durable and mark the end of the volatility that we’ve seen year to date,” Wilson added.

“The short answer is probably not,” he said. “There’s been significant damage to the major indices—more than we’ve seen in other recent 10% corrections like last summer. Many stocks are closer to a 20% correction. At a minimum, this kind of technical damage will take time to repair”