“If you’re playing a poker game and you look around the table and can’t tell who the sucker is, it’s you.”
PAUL NEWMAN, 1925 to 2008; actor, film director, race car driver, philanthropist
UNPACKING THE IMPACT OF TARIFFS
During a recent cruise through Asia, we had the opportunity to explore many of the region’s most fascinating destinations. From Singapore’s iconic skyline and bustling city life to Hong Kong’s buzzing open-air markets to the bright lights of Tokyo, each port along our voyage presented a wealth of experiences, tastes, and cultures to be uncovered in that diverse and beautiful part of the world.
Thanks to its strategic location, vast coastlines and growing economies, the Asia-Pacific region is a key global trade hub that boasts a vast network of leading seaports and is home to some of the world’s largest and busiest container ports. These ports play a vital role in facilitating international trade, serve as vital nodes in the global supply chain, and act as a crucial link for shipping routes that crisscross the globe. In 2021, the region accounted for 64.3% of global seaborne commerce, an increase from 47.9% in 2006 (Institute of the Americas, 2023). In contrast, Europe’s trade share of global seaborne commerce dropped from 27% in 2006 to 15.7% in 2021. The same is true for the Americas, whose share dropped from 20% in 2006 to 13.7% in 2021. According to the same report, the maritime sector transports approximately 90% of the world’s goods.
However, these dynamics have just seen a pivotal shift. President Trump’s sweeping tariffs threaten to reshape the global trade landscape, as many of these Asian economies that enjoy substantial trade surpluses with Washington are scrambling to negotiate favorable solutions with the current administration to prevent being slapped with higher duties. The new U.S. tariffs, unveiled on April 2, include a ‘minimum baseline tariff’ of at least 10% on all exporters to the U.S., with even higher ‘reciprocal trade tariffs’ on goods from some 60 nations to counter large trade imbalances with our country. That includes some of our biggest trading partners, such as China - which now faces duties of 145% on many goods - as well as the European Union (EU), Japan, and Vietnam. In the words of J.P. Morgan strategists, ‘the tariff rates represent the largest increase in over 100 years, making it difficult to analyze their impact, as there simply is no precedent for a modern economy to increase broad trade barriers of this magnitude.’
The unpredictability of these measures has led to heightened concerns across economies, prompting companies to rethink sourcing, pricing, and long-term investment strategies, and may provoke traditional trading partners to explore new alliances and develop deeper trade relationships that exclude the U.S. As a consequence, uncertainty will be the defining attribute of much of global trade for the foreseeable future, not only with respect to the possibility of further tariffs but also the stability and reliability of America’s relationships with its trading partners.
China has already responded in kind, raising its tariffs on U.S. products to 125%, up from its previously announced 84%, and implemented export restrictions on rare earth minerals, which are crucial for various industries including defense and technology as the tit-for-tat trade war escalated. Further retaliations across Europe and Asia are expected.
The stated aim of the tariffs is to boost domestic manufacturing and address trade imbalances, but the size and scope of the new tariffs, which substantially exceed most base-case expectations, shocked investors and unleashed turbulence across global financial markets as fears of a looming global recession intensified. The stock market’s response has been swift, with Wall Street suffering its worst weekly performance since March 2020 when the pandemic wreaked havoc on the global economy. Since the levies were announced, the benchmark S&P 500 index declined to its lowest level in 11 months and slashed $7.7 trillion in market value in just four sessions (April 2 through 8) – the largest 4-day loss on record. Markets extended their losses after Federal Reserve Chairman Jerome Powell said that ‘larger-than expected tariffs will likely lead to higher inflation and slower growth.’ The central bank faces a dilemma: if the expansive new tariffs present challenges to both, inflation and growth, choosing whether to ease to support growth or tighten to fight inflation won’t be easy, as each courts its own peril. Not even a better-than-expected report on the U.S. job market, which is usually the economic highlight of each month, was enough to stop the slide. Underscoring growing panic among investors, the CBOE Volatility index (VIX) - Wall Street’s fear gauge - spiked above 50, more than twice its normal level and the highest reading since April 2020.
At the time of this writing, the benchmark S&P 500 index is down about 17% from its February 19 record high, while the Nasdaq and Russell 2000 index officially entered bear market territory, with the Dow Jones Industrial index narrowly avoiding the same fate. A bear market is widely defined as a decline of at least 20% from a recent high.
The volatility in stocks also led to a historic selloff in government bonds. In a whiplash reversal, the yield on the benchmark 10-year Treasury note, which had slid below 4% after the tariffs were announced, spiked as high as 4.5% in its largest three-day jump since 2001 as dizzying trade moves caused investors to dump U.S. assets in favor of other global safe havens (yields and prices move in opposite directions). With the potential for further upward moves in long-term rates, fixed income investors should remain cautious of adding to duration even after the rate spike. The U.S. dollar index, which measures the dollar’s strength against six foreign currencies, has broadly weakened this year and tumbled to its lowest level since early October, which could be a further sign of investors’ concern about the health and stability of the US economy.
There were other dynamics at play, though, which have rattled equities for much of this year: the unwinding of the mega-cap tech trade and slumping forward earnings estimates. As we pointed out in our last newsletter, going into 2025, ‘stock valuations were elevated’ , both relative to their own history, and to other countries’ equites. That held especially true for the priciest and most glamorous tech issues - the Magnificent Seven.
They were the driving force behind the U.S. stock market’s strength in the past two years, accounting for more than 50% of the S&P 500’s return in both 2023 and 2024. This year, the ‘Magnificent Seven’ turned into the ‘Maleficent Seven’, and officially entered correction territory (a 10% decline from their recent high) in February, a month before the S&P 500 experienced a similar downturn. Due to their outsized weight in the cap-weighted indexes - like the S&P 500 and Nasdaq 100 - any weakness puts disproportionate pressure on the market. Thus, as of March 11, over half of the S&P 500’s drawdown could be attributed to the decline seen in the seven technology companies, according to Goldman Sachs.
Additionally, after an impressive 2024, earnings growth was expected to be even stronger in 2025. However, the estimates for every quarter of 2025 have been trending lower continuously. In January, analysts expected S&P 500 earnings per share growth to accelerate to 14% year over- year in 2025; today, the consensus estimate is 10%, or 4% lower than analysts had forecast, with earnings growth expected to decelerate in nine of the 11 S&P 500 sectors. If the consensus is correct, it would mean the growth rate in 2025 will be lower than 2024’s 12% growth. Thus, a reassessment of overly optimistic growth assumptions, coupled with steep valuations may have exacerbated the equity correction.
At the simplest level, tariffs are a tax, regardless of whether they are borne by the consumer or in corporate margins, because they increase the cost of doing business and reduce disposable income. Rightly or wrongly, most investors are now convinced that trade is by far the greatest risk out there, with 55% of respondents to a recent BofA Fund Manager Survey citing a trade war-induced recession as the biggest ‘tail risk’ faced by the market - the most cited factor since ‘COVID resurgence’ in April 2020 (see graph above).
From an economic standpoint, tariffs clearly pose a headwind to growth, as corporate profit margins get squeezed by higher input costs, while households see pressure from lower inflation-adjusted income. In addition, tariffs will likely put upward pressure on prices as U.S. importers pass on some of the cost to consumers. There are also concerns about the potential second- and third-order consequences that must be considered: will these measures truly result in a meaningful resurgence of industrial jobs, or will the economic burden fall disproportionately on everyday Americans through inflationary pressures?
Takeaways for investors
The White House’s sweeping tariff announcement has global equity markets in full retreat and raised growing economic concerns around recession and inflation risk. U.S. leading indicators have already softened, led by significant weakness in business and consumer sentiment surveys, negatively impacted by higher global tariffs and persistent policy uncertainty as those concerns are bleeding into broader economic expectations. To complicate things further, it’s unclear what President Trump’s playbook looks like from here - whether his use of tariffs is rooted in long-term economic policy or short term political strategy. While governments around the world were lining up to negotiate trade deals with U.S. officials to get out from under the tariffs, the administration’s announcement of a 90-day reprieve on tariffs for all countries except China brought short-term relief to battered global stock markets. Meanwhile, the baseline 10% tariff that went into effect on April 5 remains in place for all affected imports into the U.S. and will likely increase inflation and reduce economic growth.
While the severity of the near-term effects of the capricious U.S. trade policy is up for debate, the longer term impact will likely be the loss of trust abroad in U.S. policymaking, something that will be very hard to regain. Hence, despite the potential for a sharp bounce, with many equity benchmarks now deeply oversold, overall investor sentiment remains cautious - especially given China’s combative stance against additional U.S. tariffs.
So, where do we go from here? It’s hard to say. The very people whose job it is to predict markets and economics can’t tell you what is going to happen next month or next year with any amount of accuracy, let alone the most likely outcome of something with so many moving parts. The only certainty in this noisy, headline driven world is that by the time you read this, things may very well have changed, which only magnifies the range of emotions that investors are experiencing during this anxiety inducing period.
This current bout of unpredictability will pass eventually. In the meantime, here are a few reminders for anyone who needs help maintaining perspective:
- Remember that stock market sell-offs are normal and temporary. Although it’s impossible to predict exactly when they will happen and what will cause them, market corrections are common, and over a long enough timeframe, they are a virtual certainty - and they will be painful. According to Goldman Sachs, since 1950, the S&P 500 has seen 35 corrections (declines of 10% or more), averaging about one every 2 years. Yes, the frequency of these events doesn’t make them any easier to stomach, but research by Capital Group has shown that each S&P 500 decline of 15% or more, from 1929 through 2024, has been followed by a recovery and, over time, a new market high.
- The stock market has historically recovered quickly from corrections. Behavioral economics shows that we feel the pain of losses more intensely than the satisfaction of gains, and we certainly understand that it can be tempting to run away from danger towards safety when markets drop. However, such decisions may significantly impair your portfolio and make it harder to achieve your long-term goals. According to Bloomberg, the average time to recovery from a 5%-10% downturn is about three months, while corrections of 10%-20% typically rebound in eight months (based on the Dow Jones Industrial index; drawdowns and market cycles since 1945). Although no recovery is guaranteed, these historical patterns are reassuring, reminding investors that downturns don’t usually have lasting effects on long-term wealth.
- Time in the market matters - not market timing. Attempting to time the market to avoid the worst days could cause an investor to miss out on some of the best days. Even a few trading days can make a big difference, with seventy-eight percent of the stock market’s best days having occurred during a bear market or during the first two months of a bull market.* If you missed the market’s 10 best days over the past 30 years, your returns would have been cut in half. And missing the best 30 days would have reduced your returns by an astonishing 83% (see graph on previous page from Hartford Funds). The time when the markets bounce back from a sell-off is usually when investors make the most profit!
We witnessed a perfect example of this on April 9 as fears about a looming financial crisis gave way to historic stock market gains after the White House reversed course on the bulk of its tariffs, at least for 90 days. The Nasdaq Composite surged 12.2%, its second-largest gain on record. The S&P 500 gained 9.5%, its largest percent gain since October 2008. This dramatic rise is comparable to the amount of returns an investor typically sees in an entire year from the stock market!
- The market tends to reward long-term investors. Although stocks rise and fall in the short term, they have tended to reward investors over longer periods of time. Even including downturns, the S&P 500’s average annualized return from 1937 to 2024 was 10.7%, with average returns being positive 76% of the time, according to Franklin Templeton (see graph below).
Sticking with your long-term investment strategy is always the best course of action, but during times of market instability and financial uncertainty, it is not uncommon to lose sight of your long-term investment goals. However, the time to consider how much of a loss you can handle isn’t during a correction. Rather, you should check if your plan continues to reflect your goals, investment horizon, and risk tolerance to see if your investments are still in line with that plan. A solid investment plan should already account for volatility, and this is the time to let that plan do its job.
- We are here for you! Market selloffs don’t need to be a threat to your financial success. In fact, for the well prepared, they can be an opportunity to improve long term returns. If you are concerned about the potential impact that economic developments - like tariffs - may have on your portfolio and personal financial situation, reach out to your Telos financial adviser. We are here to answer your questions and make sure your plan is aligned with your needs so you can sleep better at night, no matter what the market is doing.
There’s an old saying: “The stock market is designed to transfer money from the Active to the Patient.” When prices fall, you can either follow the crowd and sell - or you can be optimistic about potential opportunities. We can’t control the markets, but we can control how we respond. Volatility may be unnerving, but we believe that investors who can tune out the news and focus on their long-term goals will be well rewarded for their disciplined approach over the coming years.
APRIL 2025