A massive number of hedge fund short sellers rushed to close out their positions during Wednesday afternoon’s sudden surge in stocks, turning a stunning rally into one for the history books.

Traders — betting on share price declines — had piled on a record number of short bets against the U.S. stocks ahead of Wednesday as President Donald Trump initially rolled out steeper-than-expected tariffs.

In order to sell short, hedge funds borrow the security they’re betting against from a bank and sell it. Then as the security decreases in price from where they sold it, they buy it back more cheaply and return it to the bank, profiting from the difference.

But sometimes that can backfire.

As stocks soared on news of the tariff pause, hedge funds were forced to buy back their borrowed stocks rapidly in order to limit their losses, a Wall Street phenomenon known as a short squeeze. With this artificial buying force pushing it higher, the S&P 500 ended up with its third-biggest gain since World War II.

Coming into Wednesday, short positioning was almost twice as much as the size seen in the first quarter of 2020 amid the onset of the Covid pandemic, according to Bank of America. As funds ran to cover, a basket of the most shorted stocks surged by 12.5% Wednesday, according to Goldman Sachs, pulling off a larger jump than the S&P 500‘s 9.5% gain.

And a whopping 30 billion shares traded on U.S. exchanges during the session, marking the heaviest volume day on record, according to Nasdaq and FactSet data going back 18 years.

“You can’t catch a move. When you see someone short covering, the exit doors become so small because of these crowded trades,” said Jeff Kilburg, KKM Financial CEO and CIO. “We live in a world where there’s more and more twitchiness to the marketplace, there’s more and more paranoia.”

Of course, there were real buyers too. Long-only funds bought a record amount of tech stocks during the session, especially the last three hours of the day, according to data from Bank of America.

But traders credit the shorts running for cover for the magnitude of the move.

“The pain on the short side is palpable; the whipsaw we have witnessed the past few weeks is extreme,” Oppenheimer’s trading desk said in a note. “What we saw in tech on that rise was obviously covering but more so real buyers adding on to higher quality semis.”

Thin liquidity also played a role in Wednesday’s monster moves. The size of stock futures (CME E-Mini S&P 500 Futures) one can trade with the click of your mouse dropped to an all-time low of $2 million on Monday, according to Goldman Sachs data. Drastically thin markets tends to fuel outsized price swings. 

Markets were pulling back Thursday as investors realized the economy is still in danger from super-high China tariffs and the uncertainty that daily negotiations with other countries will bring over the next three months.

There are still big short positions left in the market, traders said.

That could fuel things again, if the market starts to rally again.

“The desk view is that short covering is far from over,” Bank of America’s trading desk said in a note. “Our reasoning is that the market can’t de-risk a short in less than 3 hours which provided 20%+ SPX Index downside & major reduction in NET LEVERAGE over 7 seven weeks.”

“No shot it cleared in less than 3 hours,” Bank of America said.

Inflation throttled back in March, largely on the back of lower gasoline prices — but tariffs threaten to reverse that downward trend in coming months while trouble also lurks in certain categories like groceries, economists said.

The consumer price index rose 2.4% for the 12 months ended in March, down from 2.8% in February, the U.S. Bureau of Labor Statistics reported Thursday, indicating that inflation decelerated.

Additionally, “core” CPI — a measure that strips out food and energy prices, which can be volatile — fell from 3.1% to 2.8%, the lowest level since March 2021. Economists prefer to look at core inflation to determine underlying inflation trends.

However, there are trouble spots like grocery prices and the Trump administration’s economic policy poses a significant headwind, economists said.

“It would have been a really good day,” Mark Zandi, chief economist at Moody’s, said of the CPI report. “But because of the tariffs, the trade war, it means nothing.”

He added that “it doesn’t reflect any of the tariffs being slapped on products around the world, particularly those coming from China.”

The consumer price index is a widely used measure of inflation that tracks how quickly prices rise or fall for a basket of goods and services, from haircuts to coffee, clothing and concert tickets.

CPI inflation has declined significantly from its pandemic-era high of 9.1% in June 2022.

However, it remains above the Federal Reserve’s target. The central bank aims for an annual rate around 2% over the long term.

Tariffs, a tax paid by U.S. importers, add costs for businesses that ultimately get passed to consumers, economists said. Steel tariffs, for example, could make steel-intensive items like cars, homes and machinery more expensive, they said.

Tariffs “are going to be the main driver of inflation surging this year,” said Thomas Ryan, an economist at Capital Economics.

President Donald Trump on Wednesday backed down from imposing steep tariffs on dozens of trading partners, following a stock-market rout and surging U.S. government bond yields, which push down bond prices.

While Trump delayed so-called “reciprocal tariffs” for 90 days, all U.S. trading partners still face a 10% universal tariff on all imports. The exceptions — Canada, China and Mexico — face separate levies, however.

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Imports from China are subject to a 125% tariff, for example. In response, China put 84% retaliatory tariffs on U.S. exports. Trump has also imposed product-specific tariffs on aluminum, steel, and automobiles and car parts.

“Many products that the U.S. imports are predominantly from China. Smartphones [73%], laptops [78%], video game consoles [87%], toys [77%], and also antibiotics for U.S. livestock production,” Wendong Zhang, professor of applied economics and policy at Cornell University, wrote in an e-mail to CNBC. “Resourcing from other countries will take time and result in much higher costs.”

Trump’s tariff policy will push the U.S. inflation rate to a peak around 4% by the end of 2025, Capital Economics estimates. That’s roughly double the Fed’s long-term target.

Vanguard Group projects a similar rise in inflation, particularly for goods prices. The money manager forecasts a 4% full-year 2025 inflation rate due to U.S. tariffs and retaliation by other nations.

Economists question whether the inflation impact will be short-lived (akin to a one-time price shock) or something more persistent.

Oil prices plunged in early April, tied to fears of a global recession crimping demand, and gasoline prices are expected to throttle back further if the trend continues, economists said.

Egg prices jumped about 6% for the month and are up 60% in the past year, according to BLS data. That jump is largely attributable to a U.S. outbreak of bird flu, which has killed millions of egg-laying chickens and crimped egg supply.

Prices for instant coffee have also surged, about 13%. Weather patterns like droughts fueled by climate change have disrupted major coffee growers like Brazil, reducing supplies of coffee beans.

However, the broad increase in grocery prices isn’t attributable to one factor or agricultural product, Zandi said.

It’s “worrisome” that food inflation has picked up even as diesel prices have fallen, a dynamic that would generally serve to hold down inflation due to lower transportation costs to grocery shelves, Zandi said.

“This inflation report had some highlights, and continues to have problem areas in food prices and energy components like electricity and natural gas,” Greg McBride, chief financial analyst at Bankrate, wrote Thursday morning. “But all this is looking in the rear-view mirror. With both inflation and the overall economy, uncertainty abounds about what might be lurking around the bend.”