In early April, the Trump Administration unveiled its “Liberation Day” tariff plan, and it came as quite a shock, with the scope and severity of the proposed retaliatory tariffs far exceeding market expectations. What made the announcement even more surprising was the broad, sweeping approach—marking a sharp departure from the more targeted tariff strategy employed during President Trump’s first term. We wrote about this startling situation at the time in a special client communication, and we would like to reiterate most of that commentary again here because it’s worth repeating and still explains much of our reasoning about the recent market volatility and our outlook going forward. With potential benefits in the form of possible reshoring, lower trade deficits and elevated revenues all off in the extended future, the immediate question on investor minds is just how much the administration’s attempt to fundamentally reset global trade will negatively impact the current economy and inflation.

We entered the year with a 2.4% economic growth rate and pre-tariff inflation that was tracking at about the 2.8% level. By some short-hand estimates, every 10-percentage point increase in tariff rates equates to roughly 1% drag on GDP and 1% increase to inflation. This suggests that even with the most recent, modified tariffs that were part of the subsequent 90-day pause that came a week after the initial announcement, the likelihood of a low-grade recession is nonetheless still higher than when the year began. While the administration also previously signaled the need for a higher threshold for economic pain in anticipation of these actions, early indications suggest that reciprocal tariff levels were in large part intended as an opening negotiation gambit and, with the postponement until early July, there will be more time for more negotiations and fine-tuning. Of course, this offers little comfort to investors and corporations alike in the near term.

As of this writing, over 75 countries have reportedly reached out to begin trade negotiations with the United States, and if this continues, most countries could signal their intent to negotiate rather than retaliate. Some smaller countries like Vietnam, where exports to the U.S. as a percentage of their GDP are high, have already announced plans to lower or even eliminate their tariffs on U.S. goods. However, countries with less economic exposure to the U.S. may not be as willing to change. 

Importantly, beyond the initial broad-based response from countries looking to negotiate, there are also a series of exclusions in the underlying fine print behind the headlines. Specifically, there were no additional tariffs imposed on Canada and Mexico, and goods that are compliant with the U.S.-Mexico-Canada agreement (USMCA), which replaced NAFTA in 2020 (under the first Trump Administration), are fully exempt from tariffs. All in, approximately 50% of imports from Mexico and about 40% of imports from Canada are completely unaffected. The result is a weighted tariff level well below 10% for both trading partners. Outside of these North American geographic exclusions, some major industry categories have also been so far excluded from tariffs, including many of the semiconductors, pharmaceuticals, and critical minerals. Altogether, about one-third of the imports coming into the U.S. are presently exempt from tariffs, mitigating a sizable portion of the rather shocking headline announcement levels.

All of this is happening at a time when by most measures, the U.S. economy had been going strong. Noteworthy in this regard—although it received limited media attention when it was announced—the March jobs report came in stronger than expected. Even though it’s a lagging indicator, this report carries particular significance as it reflects the recent period when many Federal government job disruptions and layoffs occurred. More broadly, the economy remains on solid footing, with aggregate leverage (a.k.a. borrowing) ratios for both businesses and households now below 2019 levels, plus $6 trillion in estimated cash still sitting on the sidelines, and U.S. companies just posting one of their strongest quarters of earnings growth in three years during last year’s fourth quarter. While the new trade uncertainty will inevitably weigh on many of these metrics, one silver lining is that we do enter this period of disruption from a solid base.

Given the recent uncertainties in the market, the S&P 500 dipped into bear market territory in April. Interestingly, the market fell by a similar amount back in 2018 in response to tariff-driven concerns and yet it finished materially higher within a year’s time. The question this time is just how much bad news is already being priced into the market at this point. While impossible to know, declines of this magnitude usually suggest pronounced risk to corporate earnings and the economy. The Friday after the tariff announcement, the Volatility Index (VIX) reached its highest level since the onset of the 2020 pandemic—mirroring levels last seen during the Great Financial Crisis in 2008—highlighting just how elevated fear has currently become. However, unlike those past structural crises, today’s market disruption is largely self-inflicted and still mainly dependent upon the administration’s evolving approach, or possibly even some reversals as necessary; and hence market expectations for the future could materially change at any moment. This creates a highly unpredictable short-term environment but also leaves room for partial resolution, whether through policy shifts in Washington or successful negotiations with many of our key trading partners. In this context, a measured, incremental ongoing assessment and reaction makes sense.

Furthermore, unlike many periods of market volatility in the past decade or so—where almost all assets behaved similarly—highly diversified, globally allocated portfolios are now helping to mitigate volatility, even in the equity markets. During the first quarter of this year, bonds, real estate, commodities and international stocks were actually up in the face of the rather pronounced U.S.-led sell-off, providing a reminder of the importance of diversification and the benefit of a balanced approach to portfolio management.

While uncertainty remains elevated, we remain steadfast in our belief that staying calm and disciplined during moments of market duress is critically important, and that rebalancing portfolios as opportunities present themselves during such periods of market volatility is essential. This disciplined approach has been a cornerstone of our investment philosophy since the firm’s founding—and it has reliably benefited our clients over time. 

While the recent and rather sustained volatility surely feels very unsettling, history has consistently shown that market recoveries often begin when investor conviction drops precipitously, and when uncertainty feels almost overwhelming and endless. Periods of dislocation have—time and again—given way to resolution, renewed growth, and rewarding opportunity for long-term investors. With solid existing economic fundamentals, resilient corporate balance sheets, and potential for meaningful policy shifts or diplomatic progress in the works, the foundation for recovery can be laid.

When the world becomes hyper-focused on the short term, it can be valuable to think long term and take advantage of the emotions of the moment. We remain confident that with patience, discipline, and long-term perspective, investors will benefit as markets stabilize and prospects improve. If you have questions or would like to discuss your individual situation, we encourage you to connect with your Wealth Manager.