• The new tariff announcement surpassed investor expectations.
• This creates uncertainty for economic growth, inflation, and financial markets.
• This is a fluid situation and uncertainty is high, making diversification even more prudent.
After market close Tuesday, President Trump announced the long-awaited new tariffs set to begin in the coming days. The magnitude of the tariffs was greater than investors had anticipated, leading equity futures markets to sell off when they opened Wednesday night.
What Happened:
The White House issued a statement saying President Trump is imposing tariffs under the International Emergency Economic Powers Act of 1977 (IEEPA) to address the national emergency posed by the large and persistent trade deficit. A summary of the tariffs is below:
• A 10% tariff on all counties that will take effect on April 5, 2025.
• An individualized reciprocal higher tariff will be imposed on the counties with which the United States has the largest trade deficits. This will take effect on April 9, 2025.
• There are exceptions already carved out, which include copper, pharmaceuticals, semiconductors and lumber. Also, bullion and energy and other minerals that are not available in the U.S. are excluded.
• Canada and Mexico are unaffected by this order, and all USMCA compliant goods will continue to see a 0% tariff. Non-USMCA compliant goods will be subject to pre-existing tariffs.
What this means for markets and the economy:
Implications of the tariffs are complicated for many reasons. Often it is hard to gauge the impact until after the fact. Exporting companies may absorb some of the cost and countries will likely weaken their currencies to make their goods cheaper for Americans. Additionally, prices could rise for American consumers. All these factors depend on the country, tariff rate, and availability of substitutes. If a product manufactured in America or another country’s goods are cheaper, it is harder to pass price increases on to the American consumer. Also, once there is more clarity around the impacts of the tariffs, there will likely be more exceptions made.
Adding to uncertainty there are questions regarding how long tariffs will persist. President Trump likely made the deadline for reciprocal tariffs April 9 to allow time for negotiation and it is possible this deadline could be extended. A lot of these negotiations are likely to play out very publicly in the media only adding to market turbulence.
This is a very fluid situation but, broadly speaking, China was hit harder by tariffs, while Canada and Mexico may have fared better. The European Union and Japan fall somewhere in between. Economic research firm Capital Economics estimates the tariffs could increase annual customs duties to around $700 billion for the U.S. government, which is roughly 2.3% of GDP. If the money is used to pay down the budget deficit, a recession could be likely. However, if the money is used to finance tax cuts or given back to consumers, Capital Economics estimates GDP growth could average round 1.5% in 2025. Other counties will also take hits to GDP, but to a lesser degree. China could see a 0.5% cut to GDP while the euro-zone, UK and Japan could see 0.2% cuts to GDP. The impact to U.S. inflation is estimated to be an additional 2.4% to the CPI price level, making CPI inflation far north of 4% by year-end and putting the Fed in a bind with higher inflation and yet slower economic growth.
What this means for you:
We think it is prudent to be well diversified to mitigate risk. It is important to stay focused on your own long-term financial goals and avoid getting caught up in the latest headlines. Remember this is a very fluid situation and negotiations happen quickly. As always, please consult your financial professional for guidance during these times.
This report is created by Cetera Investment Management LLC. @CeteraIM
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Glossary
The S&P 500 is an index of roughly 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of large cap universe.