“Tariff Tantrum”
We typically like to use this commentary to look back on the preceding quarter in the markets. However, investors have now experienced what has probably felt like an entire year in just the first two weeks of the second quarter. As such, we thought it would be beneficial to offer perspective on recent events – primarily pertaining to tariffs – and provide some thoughts on the remaining year ahead.
Even prior to President Trump’s “Liberation Day” tariffs announcement on April 2nd, markets had been somewhat teetering. There were already concerns over softening economic data, sticky inflation, and geopolitical hot spots including Russia/Ukraine and the Middle East. Not only that, but as we discussed last quarter, stock valuations were elevated amidst a backdrop of high earnings expectations:
“Earnings are of utmost importance right now because stock valuations are at elevated levels from a historical perspective, and earnings expectations are quite high. Simply put, companies need the consumer to remain strong in order to grow earnings and justify current valuations.”
Add this all up, and the S&P 500 was down over 4% year-to-date through the end of March, its worst quarterly performance since the third quarter of 2022. The point is that as the second quarter dawned, some investors were already on edge and looking for a reason to sell. Then came President Trump’s “Liberation Day”, where he announced baseline 10% tariffs on imports from nearly all countries and higher tariffs on approximately 60 countries. President Trump:
“For decades, our country has been looted, pillaged, and plundered by nations near and far, both friend and foe alike. American steelworkers, auto workers, farmers, and skilled craftsmen – we have a lot of them here with us today – they really suffered gravely. They watched in anguish as foreign leaders have stolen our jobs, foreign cheaters have ransacked our factories, and foreign scavengers have torn apart our once beautiful American dream.”
Investors were well aware that Trump would pursue an aggressive trade policy. This was a key pillar of his election campaign last year and a clear priority following his inauguration. This is what we said in mid-January:
“As it pertains to trade, the administration is seeking to impose broad tariffs on imports, particularly from China. Once again, the end outcome is likely inflationary as tariffs typically increase the cost of goods, which companies simply pass on to consumers in the form of higher prices.”
While tariffs were fully expected, the magnitude of them and the manner in which they were rolled out on April 2nd caught many investors by surprise. That sent financial markets on a wild ride over the past two weeks as investors attempted to digest the potential impact.
At one point, the S&P 500 was down 12% from its April 2nd mark. Stocks then proceeded to bounce back – including one of the single biggest gains in history on April 9th when the S&P 500 surged nearly 10%, its third-largest daily gain since World War II. Nevertheless, through the end of trading on April 11th, the S&P 500 was still down over 5% from where it began prior to Trump’s tariffs announcement.
So, What Does This All Mean?
The biggest short-term key is how quickly meaningful negotiations take place with various critical trading partners. The recent violent market swings are due to a lack of clarity and visibility into what the final state of tariffs will look like. Just in the past several days, there has been a 90-day pause on tariffs for most countries, a hike in tariffs on China, and then tariff exclusions on certain goods from China including smartphones, computers, and other electronics. While it is admittedly cliché, investors like certainty. Without that certainty, investors grapple to project stock valuations, the direction of interest rates and inflation, and potential tail risks such as market shocks or illiquidity. The end result is market volatility such as what we have witnessed over the past two weeks.
Longer-term, the primary concern centers around the economy. It is not simply investors who favor certainty, but business owners and corporate executives. A lack of clarity into how tariffs will play out could cause businesses to pull back on spending and hiring. For example, consider a business that relies on foreign imports to produce a particular good. If the business owner lacks insight into how much it will cost to produce that good moving forward, a natural reaction might be to hold-off on further investing in the business and perhaps even pausing hiring. The focus becomes on ensuring the business is shorter-term sustainable versus driving future growth. If other business owners take a similar approach, the end result is an economic slowdown.
The other potential outcome from tariffs is inflation. At a very basic level, because tariffs likely push the cost to produce goods higher, those increased costs are passed along to end consumers. Higher prices are the last thing consumers want to see right now, given already persistent inflation. Strained consumer budgets might have a difficult time absorbing these higher prices, which would lead to a pullback in spending. Consumer spending is approximately 70% of GDP. Recent consumer confidence and sentiment have been very weak, and a pullback in spending means a slowdown in economic growth.
Putting This All Together
Now, let’s rewind back to where we began this commentary. As noted, even prior to President Trump’s tariffs announcement, there were already concerns over softening economic data, sticky inflation, elevated stock valuations, and geopolitical tensions. All of these could actually be exacerbated by tariffs. We just touched on the first two items: a potential economic slowdown and inflationary pressures. Any further weakening of the economy and/or rise in inflation would obviously impact stock valuations, which remain elevated despite the recent down move. As it pertains to geopolitical tensions, the world’s biggest rivals in the U.S. and China are now embroiled in an ideological war as the global trade order is being disrupted. The takeaway from all of this is that tariffs could negatively impact the existing pressure points in the economy and markets.
All of that said, we think there are several important points for investors to keep in mind. First, this situation is highly fluid. As mentioned earlier, there have already been meaningful changes to President Trump’s tariffs over the past several days. Because of these frequent changes, we don’t view this as an investable event overall. Politics aside, President Trump’s modus operandi is such that key trade policy points could shift drastically from one day to another. It is also far too early to know the full implications of using threats or the implementation of tariffs as part of economic negotiations. Whatever your personal view is on tariffs, they create shorter-term uncertainty in the markets. The bottom line is that this is not an environment conducive to positioning for longer-term investment success.
Second, the Federal Reserve remains a wild card. On Friday, Boston Fed President Susan Collins said the agency is “absolutely” ready to intervene in financial markets if needed. Investors will recall the “Covid crash” in March of 2020, when the S&P 500 dropped 34% in a little over a month. The Fed subsequently intervened and quickly drove stocks back to all-time highs. The point is that the Fed has several tools to combat any sort of severe economic downturn or market turmoil, though their job is certainly made more difficult by sticky inflation.
Finally, we believe the most important item for investors to keep in mind is that diversification has been working this year. International stocks, bonds, gold, and other asset classes have all outperformed U.S. stocks. While tariffs have dominated headlines, well-diversified investors would be forgiven for yawning at this entire episode. As we said in January, complicated markets are when a diversified portfolio shines best. That has proven to be the case so far in 2025.
While this recent “tariff tantrum” currently has markets on edge, our team of advisors is committed to providing you with clear insights and guidance. We always avoid taking a reactive approach to large, shorter-term market swings (in either direction) and rigorously maintain our longer-term perspective to help you achieve your financial goals.