As you are likely well aware, the stock market has been experiencing heightened volatility of late due to President Trump’s recent tariff policy announcements. Fear levels are on the rise and uncertainty has rarely been higher, but we would like to offer some perspective on what is happening and thoughts on how to navigate.
There is no underselling it – Trump’s unveiling of his “reciprocal” tariffs on April 2nd was one of the largest changes in US economic policy in decades. The tide of de-globalization that was already in place just got a giant gust of wind at its back. The tariff levels announced last week were higher than even the worst-case scenarios that were predicted – not only in their levels, but their breadth as well. The chart below shows Goldman Sach’s base case for effective tariff levels (before April 2nd) compared to the effective tariff rate over the past 100 years. Based on last Tuesday’s announcement, the tariff rate is now going to 18-20% – in line with levels of the 1930s.
By including a broad swath of Asian countries (Vietnam, Thailand, Taiwan, etc.), Trump’s announcement also ensured that there are not many options to secure low-cost manufacturing. This is why the retailers, tech companies, and other import-centric companies are selling off so violently. We knew that China would be in Trump’s crosshairs, but there was hope that its production could at least be partially shifted to other low-cost countries.
There is a lot of uncertainty whether these tariffs are just an opening salvo in an effort to induce “fairer” trade policies, and will come down as other countries negotiate, or if these tariffs are more structural and not open to negotiation. The market at this point will hinge on the progression of these two outcomes. The former would be a lift for the markets, the latter could mean a difficult slog ahead.
Whether you feel that this tariff policy is justified or not, there is no way around the fact that these tariffs mean higher prices, lower demand, and lower profits for companies most exposed and for the economy as a whole. Tariffs are a tax and will be a headwind for economic growth as prices adjust and supply chains reconfigure.
What will the impact be? Analysts, including our Investment Team, are fishing somewhat in the dark as to where earnings levels will settle for individual companies and the market. The last time we saw such action was in the 1930s, and there is not much precedence to model this kind of impact – the world is vastly different now. Current Wall Street models are predicting that the tariff impacts will bring down earnings growth for the market from double digit growth to potentially single digits or flat, bring down GDP growth (perhaps 1-2%), and push inflation higher still. If we enter an economic recession, these numbers could move even lower. The odds of such a recession have increased significantly over the course of 2025.
While the news certainly seems dour, there are some offsetting positives.
Interest rates have seen a significant decline, which should be a lift for borrowers and consumers. The odds of the Fed lowering rates more aggressively this year have significantly increased.
Other countries are quickly coming to the table to negotiate trade deals – we have seen Vietnam, Taiwan, Indonesia, India all indicate no retaliation, plus willingness to negotiate. Europe and China’s retaliatory actions will be crucial to watch over the coming days.
Energy prices are on the decline, which should help soften the inflationary impact of the tariff price hikes.
We have yet to see the tax reductions the Trump campaign promised – these should move to the forefront soon.
The market has already pulled back almost 20% from its highs. The median pullback during recessions is 24%.
Warren Buffett uttered the famous line “be greedy when others are fearful,” and the market is certainly in a level of historic fear. The VIX index, a measure of market volatility and often cited as “the fear index,” recently crossed 45 – a level seen only during the most substantial economic turbulence of the past 35 years.
Below is a table of previous episodes where the VIX closed above 40 along with the percentage gains in the market from those eventual lows to today:
Fear has always bred opportunity in the market, even though in the midst of the storm it can feel painful. There is one thing that consistently rings true – when you are in the middle of the storm, the way out may not seem possible or even plausible. But it always is, and the numbers speak for themselves.
That’s not to say that the way out is going to be easy (although Trump could turn things around with a few tweets), but what we do know is that trying to time the market during these times of volatility can be fateful. Perhaps some short-term pain can be alleviated by avoiding a few down days, but more often than not you also miss the large up days crucial to long-term returns. Missing just a few of the best up days in the market can cut your ultimate returns in half or more.
We are committed to our strategy of adhering to each client’s long term financial plan – reserving the riskiest assets, like equities, for the longest time horizons (10+ years) which provides time for recovery. In addition, our use of broad diversification is paying dividends. The bond market is providing welcome ballast in these turbulent times, and because our equity exposure is spread out beyond just the popular large growth stocks, our portfolios have benefited. Value, dividend, and international stocks have shown relative outperformance this year. We continue to stay grounded to these time-tested fundamentals while also looking to take advantage of the opportunities that are always born out of volatility.
Investment Commentary: Tariffs and the Markets – April 7, 2025
By Jonathan McAdams, CFA®
Chief Investment Officer
As you are likely well aware, the stock market has been experiencing heightened volatility of late due to President Trump’s recent tariff policy announcements. Fear levels are on the rise and uncertainty has rarely been higher, but we would like to offer some perspective on what is happening and thoughts on how to navigate.
There is no underselling it – Trump’s unveiling of his “reciprocal” tariffs on April 2nd was one of the largest changes in US economic policy in decades. The tide of de-globalization that was already in place just got a giant gust of wind at its back. The tariff levels announced last week were higher than even the worst-case scenarios that were predicted – not only in their levels, but their breadth as well. The chart below shows Goldman Sach’s base case for effective tariff levels (before April 2nd) compared to the effective tariff rate over the past 100 years. Based on last Tuesday’s announcement, the tariff rate is now going to 18-20% – in line with levels of the 1930s.
By including a broad swath of Asian countries (Vietnam, Thailand, Taiwan, etc.), Trump’s announcement also ensured that there are not many options to secure low-cost manufacturing. This is why the retailers, tech companies, and other import-centric companies are selling off so violently. We knew that China would be in Trump’s crosshairs, but there was hope that its production could at least be partially shifted to other low-cost countries.
There is a lot of uncertainty whether these tariffs are just an opening salvo in an effort to induce “fairer” trade policies, and will come down as other countries negotiate, or if these tariffs are more structural and not open to negotiation. The market at this point will hinge on the progression of these two outcomes. The former would be a lift for the markets, the latter could mean a difficult slog ahead.
Whether you feel that this tariff policy is justified or not, there is no way around the fact that these tariffs mean higher prices, lower demand, and lower profits for companies most exposed and for the economy as a whole. Tariffs are a tax and will be a headwind for economic growth as prices adjust and supply chains reconfigure.
What will the impact be? Analysts, including our Investment Team, are fishing somewhat in the dark as to where earnings levels will settle for individual companies and the market. The last time we saw such action was in the 1930s, and there is not much precedence to model this kind of impact – the world is vastly different now. Current Wall Street models are predicting that the tariff impacts will bring down earnings growth for the market from double digit growth to potentially single digits or flat, bring down GDP growth (perhaps 1-2%), and push inflation higher still. If we enter an economic recession, these numbers could move even lower. The odds of such a recession have increased significantly over the course of 2025.
While the news certainly seems dour, there are some offsetting positives.
Warren Buffett uttered the famous line “be greedy when others are fearful,” and the market is certainly in a level of historic fear. The VIX index, a measure of market volatility and often cited as “the fear index,” recently crossed 45 – a level seen only during the most substantial economic turbulence of the past 35 years.
Below is a table of previous episodes where the VIX closed above 40 along with the percentage gains in the market from those eventual lows to today:
Fear has always bred opportunity in the market, even though in the midst of the storm it can feel painful. There is one thing that consistently rings true – when you are in the middle of the storm, the way out may not seem possible or even plausible. But it always is, and the numbers speak for themselves.
That’s not to say that the way out is going to be easy (although Trump could turn things around with a few tweets), but what we do know is that trying to time the market during these times of volatility can be fateful. Perhaps some short-term pain can be alleviated by avoiding a few down days, but more often than not you also miss the large up days crucial to long-term returns. Missing just a few of the best up days in the market can cut your ultimate returns in half or more.
We are committed to our strategy of adhering to each client’s long term financial plan – reserving the riskiest assets, like equities, for the longest time horizons (10+ years) which provides time for recovery. In addition, our use of broad diversification is paying dividends. The bond market is providing welcome ballast in these turbulent times, and because our equity exposure is spread out beyond just the popular large growth stocks, our portfolios have benefited. Value, dividend, and international stocks have shown relative outperformance this year. We continue to stay grounded to these time-tested fundamentals while also looking to take advantage of the opportunities that are always born out of volatility.
Shannon DermodyTEST