Market Note: April 3, 2025

Financial markets were on pins and needles as ‘Liberation Day’ approached on Wednesday, after a volatile few weeks of uncertainty surrounding tariff policy. Despite news of a 10% global tariff rate being broadly applied, and a smorgasbord of individual country- and product-specific rates, we only have some improved clarity on trade conditions compared to a few weeks ago. (The full announcement from the White House is available here.)

Some pessimists were surprised by the high overall tariff percentage rates, which included a 10% blanket global base level, as well as higher specific rates of 54% on China, 20% on the EU, 24% on Japan, and 26% on India, all set to begin in the coming week. The overall net tariff rate has risen dramatically, at least in its initial form. Excluded were some specific items already hashed out, like steel, and Mexico and Canada, based on the earlier announcements and likely re-negotiation of the USMCA (formerly NAFTA) trade agreement later this year. In total, about one-third of imports were deemed exempt, which tempers the bad news a bit. On the other hand, several countries announced retaliatory measures, which could solicit their own further U.S. response. Per the administration’s prior actions, some optimists might point to yesterday’s announcement as being a likely ‘starting point’ for negotiations, which will likely reduce the overall tariff rate as separate deals are made (quickly or slowly). Global trade agreements include thousands of individual products, including different rates and exceptions, so the process involves a lot more complexity than is often assumed.

From the President’s own words, aside from a desire to follow the “golden rule on trade” of “treat us like we treat you,” the objective was to raise around $600 bil. in revenue, which is just over 2% of U.S. GDP. While tariffs pale in comparison to revenue raised through income taxes, it appears to be intended as provide a runway for tax cuts this year, in terms of replacing at least some of the lost revenue. This assumes, of course, that economic growth plugs along at its current pace, as a slowdown in activity would reduce tax revenue from both trade and income. Tariffs can reduce buying power on a macro level, and yes, the irony is that taxes are ramping up on the front end to be coupled with possible reductions this year on the back end. A story for another time is that these revenue amounts are quite small in relation to the Federal budget deficit and certainly to the overall level of U.S. government debt. For the latter, with over 70% of the budget dedicated to mandatory expenditures (the bulk of which being tied to Social Security, Medicare, Medicaid, and related benefits), other ‘tweaks’ will have to be eventually looked at, as closing the deficit and/or reducing the debt load through smaller policies is unlikely to make a sizable dent.

The dramatic announcement soured U.S. stock market futures last night and this morning, which shows us that investors are starting off with pessimism before sorting through the post-tariff aftermath. (Interestingly, European and Asian market declines have been less dramatic.) This becomes much more complex due to the fact that the impact from tariffs is unique by country and product, as noted, and provides an unclear timeline on a return to more normalcy. From the administration’s statements, other than for tax revenue, this period of pain appears to be intended to get the U.S. economy to an ultimately better place, perhaps one of greater self-reliance with a stronger manufacturing base akin to an era last seen decades ago. Whether one is a fan or foe of free trade, the world economy has evolved over the last 50 years to one that is far more global trade-based, making a quick transition to greater self-sufficiency challenging. As the purpose of global trade is to manufacture in places with the lowest cost and greatest worker efficiency, a high tariff policy is assumed to no doubt raise costs, as those efficiencies are removed. From a geopolitical standpoint, some of the administration’s hardball policies appear to be at least somewhat effective, with Europe (Germany) allowing fiscal spending to ramp up in response to higher national defense responsibilities.

More directly, the negative impact on equity markets is, as usual, based on the assumed impact on company earnings, which is no doubt tied to economic growth in addition to individual profitability dynamics. Tariffs naturally raise costs, which either must be absorbed by a firm (reducing profits) and/or passed on to consumers (acting as a tax of sorts, inflating end prices). Neither option is a great one from an economic standpoint, but recent U.S. company earnings calls have implied passing costs on to consumers is the more likely outcome. That explains why most mainstream economists tend to not look favorably on tariffs, other than in circumstances of national security or specifically targeted to certain industries only.

If there is good news, it’s that we may have reached ‘peak uncertainty’ (for financial markets, uncertainty has tended to be even worse than terrible news), and that the policy uncertainty is occurring during a period when the underlying economy is otherwise “in a good place” (as Fed Chair Powell has described it). Unlike far worse economic environments, many companies find themselves not overindebted. This has likely been the reason why bond markets haven’t reacted as negatively to this year’s ‘risk-off’ events, although corporate credit spreads have widened a bit. This provides some degree of buffer against negative shocks like this, although there is a limit, and recession odds have increased over the past few weeks. As of this morning, though, the odds of Federal Reserve policy rate cuts have only increased back from around one to around four for 2025, and just one more for 2026. If fears of a substantive recession had indeed risen further, it’s fair to assume more cuts (on the order of up to a few percent) would have to be baked in.

Looking at where we were at the start of the year, with somewhat extended U.S. stock valuations, it doesn’t take much to instigate a drawdown. Including this morning’s early movements, the S&P 500 remains down just beyond that -10% correction level. (Since World War II at least, -10% corrections have occurred at least once every 1-2 years, with full -20% bear markets every 6-7 years.) While global stocks have often followed the U.S. lead, this year has been quite different, with positive returns in developed and emerging markets, in addition to bonds (as yields have fallen back, having started at higher levels that we’ve been used to in recent years). There were also positive results for Q1 in areas like real estate and commodities. Some investors found themselves overly excited about U.S. large cap growth and technology-related stocks specifically over the past few years, despite extended valuations. While geopolitical events can be a source of distressing volatility in the short term, long term results have tended to be driven by fundamentals, as back and forth noise is neutralized. Asset allocation and its implied diversification benefits have certainly softened the blow this year, offsetting some of the dire domestic media headlines.

Ryan M. Long, CFA

Director of Investments

FocusPoint Solutions, Inc.

Sources: Capital Group, CME Group, Morningstar, FocusPoint Solutions calculations.

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Sources: Ryan M. Long, CFA; Director of Investments; FocusPoint Solutions, Inc.

FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms. 

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