Market reaction to Trump’s “Liberation Day” tariff plan has been swift and decidedly negative. On Thursday, the S&P 500 shed $2.4 trillion in value in its largest one-day loss since the early days of COVID. As of writing, the markets are down another 5%. In his Wednesday address, the President announced a baseline 10% tariff on imports from all countries and what he called “reciprocal” tariffs on many of our trading partners. We’ve all known the tariff announcement was coming, so why did the market react so strongly? In the days and weeks leading up to the announcement, Trump and his team described the tariffs as reciprocal. Webster defines the word as “consisting of or functioning as a return in kind.” Considering the European Union levies a 2.7% tariff on U.S. imports and Japan 1.9% most observers felt Trump’s tariffs would be in line or slightly higher than those imposed on American goods. That’s not what happened. Using a highly unconventional method of calculating “tariffs” which supposedly account for “trade barriers” and “currency manipulation” Trump and his team imposed much larger tariff rates than anyone had expected. To come up with these numbers, Trump took the trade surplus of a country with the US, divided it by the value of US exports and then divided the product by two. To see how this works, consider a small community with a doctor and a dry cleaner. Over the course of the year the dry cleaner has had health issues and spent a total of $20,000 with the doctor. The doctor, on the other hand, has just done her regular dry cleaning and spent $5,000. At the end of the year the dry cleaner shows up at the doctor’s house incensed that she’s hit him with a 75% tariff. $5,000/$20,000 equals 75%. That’s of course not the case, but it is how these tariffs were calculated.
Indonesia, where the average monthly income is equivalent to $2,725 was hit with a 32% tariff rate. It’s just not realistic to think Indonesia with its 285 million people can reach trade parity with the US and its 341 million people and nearly three times larger average income. This same argument can be made for other countries. There also seems to be confusion in the administration over whether Trump is open to negotiations. Commerce Secretary, Howard Lutnick and Treasury Secretary Scott Bessent both saying he was not only to be contradicted by Trump himself, perhaps encouraged by the market reaction.
So, what does this mean for the economy and markets? I will start by stating the obvious, we don’t have a crystal ball, and the situation is very fluid. All of this could change as quickly as it came on. As we look at things today the odds of a recession have increased substantially. The economy was already slowing, and this could push us over the edge. We are also revising our inflation expectations up to 4% to account for higher prices. Entering the year, markets were anticipating two rate cuts by the Federal Reserve Bank (the Fed) this year, however considering the rising risk of recession, the odds of four or five rate cuts have grown substantially. This may put the Fed in the uncomfortable position of having to lower rates to combat a slowing economy while inflation is ticking higher. So far, the employment picture in the US looks healthy. Today’s report showed stronger than expected job growth pointing to a stable labor market. Household balance sheets remain strong and debt service, while it has risen over the last year, is still far below ’08 levels and even below pre-pandemic levels. All of this to say, while sentiment has turned decidedly negative, the fundamentals of our economy are in good shape which leads us to believe any recession would be short lived and mild.
Markets are volatile, they always have been, and they always will be. This is why we are fierce advocates of diversification. I know we can sound like broken records, especially when the S&P 500 just keeps going up and up. There have even been popular social media trends telling people to just buy the S&P 500 and “chill”. It’s times like these that remind us why diversification is so important and that investing in different asset classes can help you weather the bad times. As of this writing, the S&P 500 is 15% off its late February peak and down about 12% year-to-date. The Magnificent 7 stocks are down more than 20%! The Aggregate Bond Index on the other hand has rallied about 4% so far and international stocks are also positive on the year. When the headlines are terrifying, and talking heads are pulling their hair out, you can rest assured knowing that your investments are likely to hold up much better than the market.
There’s no way to predict where things go from here. Many pieces of the puzzle are yet to be placed. How long will the tariffs last? Will countries negotiate better terms? When will we see the promised tax cuts and regulatory reform? What, if any fiscal stimulus will Congress pass? Will there be a DOGE dividend paid out to the public? Could these tariffs result in new manufacturing facilities and new jobs here in the US? It’s important not to react too strongly to short-term events. What I can tell you is that our financial plans assume we will experience bad markets like this. Remember, we are long-term investors. I suspect that after an adjustment period the markets will fully price in this information and we can move on to the next thing. For now, we at EBW are holding tight, confident that our strategies are well positioned for the market turmoil but always vigilant to see if changes are necessary. I just don’t think this is a time to sit on the sidelines in cash because it was one press conference that kicked this off and it could be one press conference that sends markets soaring. As always, please reach out to us if you have any questions or just want to chat about what’s going on. We’re always glad to hear from you.
The views stated in this piece are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
The Bloomberg U.S. Aggregate Total Return Value Unhedged Index, also known as ‘Bloomberg U.S. Aggregate Bond Index’ formerly known as the ‘Barclays Capital U.S. Aggregate Bond Index’, and prior to that, ‘Lehman Aggregate Bond Index’, is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).”