Tariffs and Market Volatility
WHAT HAPPENED?
On April 2, President Donald Trump announced the highly anticipated U.S. reciprocal tariff plans under the International Emergency Economic Powers Act.
The U.S. imposed a 10% tariff on all countries, which took effect on April 5, along with higher tariff rates on nations the U.S. has larger trade deficits with, which will take effect on April 9. China will be charged a tariff rate of 34%, which will stack on the 20% tariffs imposed earlier this year. Other major trading partners of the U.S., such as the European Union, Vietnam and Japan, will be subject to tariff rates of 20% or more.
Two of the U.S. largest trading partners, Canada and Mexico, were exempt from the reciprocal tariff announcement. While Canada and Mexico will still be subject to tariffs on steel, aluminum and autos, along with all non-USMCA compliant goods, this represents a lower effective tariff rate compared with the 25% tariff on all Canadian and Mexican imports (10% on energy products) that was proposed earlier this year.
China was the first country to announce retaliation by imposing a 34% tariff on U.S. goods, matching the reciprocal tariff rate the U.S. announced on April 2.
Source: whitehouse.gov
There appears to be a big discrepancy on what tariffs the U.S. is actually being charged. One of the challenges with the handout distributed by the Administration last Wednesday, which had a long list of countries with percentages listed under two headings: Tariffs Charged to the U.S.A and U.S.A. Discounted Reciprocal Tariffs. Under the first heading, there is a subhead in smaller font: Including Currency Manipulation and Trade Barriers. How does one accurately calculate the impact? There is a great deal of discussion on the subjectivity of the figures.
WHAT ARE THE POTENTIAL ECONOMIC IMPACTS?
It is difficult to assess what the longer-term impact will be until we know where this all ends. What countries will reach out to the U.S. to engage in thoughtful dialogue, and which countries will merely enact retaliatory tariffs? What tariffs will be permanent versus temporary?
Uncertainty drives hesitancy. As David Kelly, Chief Economist for JP Morgan, notes in the short term “the impact on consumer pocketbooks will be higher prices, mostly due to uncertainty. Business will be reluctant to hire or commit to capital spending ahead of a potential recession. They will also likely hesitate to buy inventory for fear that, as soon as they have paid the higher tariffs, the President will change his mind and the tariffs will revert to lower numbers.”
In anticipation of the tariffs, U.S. consumer confidence fell to the lowest level in four years. In his annual letter to shareholders, Jamie Dimon noted that “whether or not the menu of tariffs causes a recession remains in question, but it will slow growth.”
Also, to keep in mind, we have a progressive tax system in the U.S.; the higher your income, typically the higher the tax bracket you are in. The lowest bracket starts at 10%, the highest at 37%. Whereas tariffs have the potential to be regressive, because they disproportionately impact lower income households.
HOW DID THE MARKET REACT?
With President Trump vowing for months to impose tariffs, no one can legitimately claim to be surprised. However, there was genuine surprise in the size and scope of the tariffs actually enacted.
Global markets experienced a rapid sell off with the S&P500 falling more than 10% in two days. Thursday and Friday also saw significant declines among international stocks, bond yields and oil prices as well as declines in the value of the dollar.
After two years that were dominated by outsized returns in U.S. large-cap stocks, diversification has showed its merit in 2025. Despite volatility in U.S. equity markets, international stocks and U.S. investment-grade bonds are breakeven or positive year-to-date, helping offset the impact of U.S. stock underperformance for investors with well-diversified portfolios.
Source: FactSet
This chart shows the relative performance of stock and bond indexes year to date, with performance indexed to 100 on 1/1/2025. Results are through 3/31/25 and do not include reciprocal tariffs that began on 4/2/25. Past performance does not guarantee futures results.
With all of the hyper focus on recent market volatility, having perspective is critical to maintaining the right attitude when investing. Yes, over the last few weeks the broad U.S. market has dropped almost 15%. However, over the last 12 months, the U.S. market is down less than 2% – not exactly a full-on market crash.
Market history also provides us with important perspectives in times of uncertainty. The following charts – Stock Gains Can Add Up After Big Losses and Do Downturns Lead to Down Years? – show that when markets experience short-term turbulence, there is often correction that typically leads to a positive longer-term narrative.
Stock Gains Can Add Up After Big Losses
Source: Dimensional Funds
Do Downturns Lead to Down Years?
Source: Dimensional Funds
Even with the potential price increases created through the tariffs, the U.S. economy still has a lot of positives to stand on:
· Combined corporate profits in the S&P500 = the highest ever
· Net interest payments by corporations = lowest ever
· March 2025, non-farm payroll employment increased by 228,000, significantly exceeding expectations
· Unemployment remains low at 4.2%.
Uncertainty can hinder decision-making and investment. However, one thing we do know is that businesses are resilient and adaptable, and they do not stand still. Once the tariff situation is stabilized, however it ends up, businesses will adapt to the new normal. We also know that technology will continue to play a critical role in helping businesses run more efficient to offset any incremental costs.
WHAT GUIDANCE IS TRINITY RECOMMENDING BASED ON MARKET DEVELOPMENTS?
This is where the time invested upfront with each of you shows its value. Formulating a solid and adaptable financial plan together and discussing liquidity, cash flows, and reserves, provides the solid footing needed for times like these with many changing facets.
While the current market and economic challenges warrant our attention and deep concern, they aren’t reasons to panic. The most obvious example of overreaction is trying to dump investments when the market is dropping.
Investing in markets is uncertain. Markets drop, that is an unavoidable part of investing. We cannot control what policies the Administration puts out, what the Federal Reserve does or what happens to corporate profits. What we can control is how we respond.
The Charles Schwab & Co. chart below echoes a message we share regularly:
We would never try and predict what might happen over the next year, 5 years, or even 25 years. Rather than always betting on up, our goal is to diversify portfolios to have some investments that go up when others go down, which historically reduces risks more than it reduces returns.
As noted above, even though the U.S. market is down fairly significantly in the last few weeks, fixed income and international stocks are up or flat this year.
The future is uncertain. Fortunately, lessons from the past can provide guidance. We remain unwavering and confident that the best strategies are the ones we outline and continue to reinforce with each of you:
HAVE AN INVESTMENT PLAN
An investment philosophy serves as a compass to guide you through turbulent times. When you have a compass, it doesn’t take drastic directional changes to find your way. Establishing and adhering to a well thought out investment plan, ideally agreed upon in advance of periods of volatility, you can remain confident and calm during periods of short-term uncertainty.
ALIGN PORTFOLIO RISK WITH GOALS
As investors, our risk appetite often changes based on the market environment we are in. You want to have a plan in place that gives you peace of mind regardless of the market conditions.
STAY DISCIPLINED / BE PATIENT
Financial downturns are unpleasant for all market participants. While no one has a crystal ball, adopting a long-term perspective can help change how you view market volatility.
We appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss with you.