The biggest hurdle facing markets: Should investors stop taking Trump's tariffs seriously?

• Trump eased tariffs on tech and hinted at auto industry exemptions, causing market uncertainty.
• This uncertainty has paralyzed some investors.
• UBS head of asset allocation Jason Draho says more pain could be ahead for markets.

President Donald Trump blinked again on his aggressive tariff policies this past weekend, giving exemptions to smartphones and laptops after he paused his steep "reciprocal" tariffs for most countries last week. On Monday, he appeared willing to budge further, saying the auto industry could be off the hook as well.

The about-facing may seem like a bullish development for investors, who have made clear in recent months that they loathe tariffs. But they raise the question: how seriously should they take his remaining tariff policies, like the 125% fees on Chinese goods or the 10% baseline tariffs on all US imports?

That question, perhaps even more than the tariffs themselves, might be the biggest hurdle investors now face. The market is left wondering which policies Trump will keep in place and which he will walk back, creating a nightmare for coming up with an asset-allocation strategy. Should you go risk-on again or stay defensive?

"A temporary reprieve on some tariffs is certainty welcome, but it's not sufficient for investors to regain confidence in Trump 2.0," said Jason Draho, head of asset allocation at UBS, in a client note on Monday.

"That requires clarity on what exactly Trumponomics entails, which will help investors cut through the noise to get a clearer sense of the overall policy and economic direction," he continued. "If clarity isn't forthcoming on its own, discipline may have to come from the markets."

Dan Bustamente, founder of the hedge fund Bustamente & Co., said he's reduced his exposure to stocks in recent weeks from 80-90% to 35% given the uncertain policy environment.

"When you do stuff like this, you're not going to get people allocating capital," Bustamente told BI on Monday.

Further uncertainty is created for investors by the uncertain environment that tariffs create for Main Street and everyday consumers. Recent data from the National Federation of Independent Business shows that optimism among small business owners plummeted in March.

The University of Michigan's Consumer Sentiment survey also showed a collapse in spenders' outlook, with the gauge falling to one of its lowest-ever levels.

This has caused recession fears to jump. If consumers aren't spending because they fear inflation ahead, growth slows. If growth slows, the labor market could start to soften. The labor market also takes a hit if businesses aren't hiring due to their inability to plan ahead.

Many firms are now pricing in a coin flip's chance of a downturn.

"Elevated policy uncertainty has begun to show up in what we call the 'soft survey data,'" said Jeff Schulze, head of economic and market strategy at ClearBridge Investments, in the firm's April 11 "Talking Markets" podcast. He added: "It's a key reason why we still have a 50% chance of a recession looking forward."

Given these dynamics, markets might be set for more turbulence ahead until Trump provides a clearer picture, Draho said.

"The tariff delay occurred only after bond yields rose quickly and the proper functioning of the Treasury market was at risk, not after the S&P 500 was down nearly 20%," Draho said. "Investors may keep pressing until they get policy clarity, and a pivot toward pro-growth policies that they prefer. Consequently, it may get worse before it gets better in the markets, and a bigger Trump put is exercised."