What’s happening?
Equity markets moved sharply downward today as President Trump announced a modified version of reciprocal tariffs across the globe. Most shockingly, the announcement included a global 10% blanket tariff – which has created a perception among investors that tariffs are being used as an unpredictable political weapon instead of a carefully considered economic policy. The core concept is that many countries have historically applied tariffs to US goods far in excess to what the US has applied in return. The Trump Administration is attempting to use large relative increases in tariffs to bring manufacturing back to the US, reduce the tariffs applied to US goods, and drive more balanced trade relationships with the rest of the world.
Country by country chart, as presented
When do the new tariffs go into effect?
Before April 2:
• 25% Mexico and Canada – on non-USMCA compliant goods
• Canada tariffs are pending recent Senate activity to block tariffs but is unlikely to pass the House.
• 10% on Canadian energy
• 25% on global steel and aluminum
• 20% on Chinese imports
Anticipated on April 5:
• A blanket 10% tariff on all imports (unless an exception is made for existing tariffs)
Anticipated on April 9:
• All reciprocal tariffs are imposed.
What is the expected effect?
Even the most pessimistic forecasts did not correctly guess the magnitude of yesterday’s announcement, as evidenced by the stock market’s reaction. Aside from the staunchest supporters of President Trump, the overwhelming majority of economists and analysts agree a broad tariff war won’t solve the trade imbalance issues and will create substantial economic headwinds if the tariffs are left in place.
At best, President Trump can negotiate a reduction on the total tariffs placed on US goods to achieve a win in the short-term – but the major problems of massive trade imbalances and attracting manufacturing back to the US will take years and billions of dollars to accomplish.
Simply put, if tariffs are left in place for a sustained period, the economic expectations are:
• Higher inflation due to a higher cost of final goods. Then,
• Substantial reduction in consumer spending, especially lower income households. Then,
• Lower global production as demand wanes and economic data becomes uncertain. Then,
• Companies reduce hiring and eliminate positions, which creates even less consumer spending – and eventually a recessionary environment.
What should we do now?
If one thing is for certain, we can expect the Trump Administration to adjust its course at some point. We’ve consistently seen policy modifications, delays, and removals as back-channel negotiations occur.
Further, the Senate has already seen bi-partisan cooperation to block the Emergency Declaration that enabled the 25% tariffs on Canada. Although largely symbolic since the resolution in unlikely to pass the House, it does show Republicans are not 100% aligned and increases the odds that changes will occur.
Although equity markets are volatile as yesterday’s announcements are digested, history tells us we need to see concrete data that demonstrates a true economic impact and a direct link to corporate earnings before making substantial changes to portfolios. Until we see those data sets emerge, we want to follow a measured level of risk management that scales with the data.
Talking points summary
• Are we starting a recession?
- The current economic data does not support we’re nearing a recession like 2000 or 2008. The market volatility we’re experiencing is largely speculation that sustained tariff policies could lead to a recession at some point, but history tells us this type of speculative volatility reverses quickly.
• Could tariffs create a recession like 2000 or 2008?
- Yes. If the current tariff policy is left in place for too long or doesn’t create the intended results, there is a substantial chance a deep recession could form. We will continue to closely track the data and make risk adjustments in-line with your financial plan as needed.
• What will the Fed do?
- The Fed has made it very clear their main concern is reducing inflation. If the tariffs drive higher inflation, it is possible the Fed will maintain or raise interest rates, which would create another headwind for the economy.
- However, tariffs may also drive consumers to reduce spending in the same way that higher rates could. If that were to occur, the Fed may reduce rates to stimulate the economy and reduce the risk of job losses. A reduction in rates would soften the net effect of tariffs on the consumer.
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