Donald Trump has discussed his love of tariffs for years—on the campaign trail, on social media, and during much of his first term as president. He believes that tariffs are a way for the United States to correct perceived injustices and imbalances created by globalization. In his first term, he implemented some tariffs that were modest in scale and narrow in scope. Accordingly, since his election in November, markets were quietly repositioning and preparing for some level of tariffs, but price action was muted—likely anticipating more bark than bite from the new administration. But the president has shown a new level of ambition and boldness in his second term, intent on extending the reach of the executive branch in all directions. No tool expands his influence more than the widespread use of tariffs under the guise of national security. The world and financial markets were unprepared for the shock that came on April 2nd—the Orwellian “Liberation Day”—when Trump presented global tariffs at levels not seen since the 1930s.
The response from investors was immediate: stock markets around the world dropped sharply. The S&P 500 lost 13% in just under a week. This likely doesn’t need much explanation—almost no business leaders and few economists argue that tariffs are good policy. The U.S. economy has grown dramatically in the post-war era of globalization. Nearly all domestic manufacturing, from medical devices to cars to airplanes, relies on imported components. Raising the cost of these inputs simply raises the cost of the final product, becoming inflationary if passed to the consumer—or cutting into profits if absorbed by the manufacturer. That’s the theoretical case against tariffs. The real-world impact is now unfolding as companies report earnings this month. So far, we haven’t seen a single executive express optimism that the Trump tariffs will benefit their business in 2025.
There are reasonable arguments for placing limits on free trade—such as countering unfair practices or ensuring domestic production of critical goods. The CHIPS Act, passed in 2022, was a bipartisan effort to reestablish U.S. semiconductor manufacturing capacity. But such efforts require years of planning, steady investment, and policy stability. Now, much of that investment is in limbo as the new administration seeks to refashion—or potentially renegotiate—aspects of that initiative. There is no clear indicator why this is happening, other than vague comments about it being a “horrible thing” combined with confidence that someone can negotiate better deals. As with many changes under this administration, previously clear incentives have been replaced by mixed signals and uncertainty, in this case delaying the reshoring of critical manufacturing the President so desires.
Meanwhile, the suddenness and severity of Trump’s tariff proposal gave U.S. companies an impossible task on an impossible timeline. Eventually, he had to back down—pausing tariffs above 10% for all countries except China for ninety days. And even China was quietly granted exemptions on certain goods, including electronics. A sharp relief rally in stocks followed, but it has not been sustained. Too many clouds now hang over the outlook for investors. U.S. stocks have struggled to hold any gains and remain down more than 10% this year. The dollar is declining and gold is the best-performing asset class this year. At the moment, the underperformance of U.S. stocks relative to global peers in April is the worst of any month in 32 years. Markets are sending a clear signal: this is a failed economic policy—and uniquely harmful for the United States.
The U.S. consumer enjoys some of the highest discretionary income in the world, earns and spends in the global reserve currency, and has access to a wide range of affordable goods and services. Myriad caveats and inequities exist within this globalized system, but it has, on balance, benefited our country tremendously. The market is rightly concerned with any hastily conceived effort to unwind it.
Current Strategy
The April stock decline has been broad, affecting nearly all sectors. It builds on a more modest decline that began earlier in the year, particularly in technology stocks. After a massive rally that began in 2023, some correction was expected—especially as enthusiasm faded around artificial intelligence-related companies. With added headwinds, the technology-heavy Nasdaq Index entered a bear market in April, falling more than 20%. We began this period with a generally light allocation to stocks for many clients. This reflected our view that U.S. equities were somewhat expensive—and did not fully price in risks from a potentially disruptive economic agenda. While we didn’t foresee just how extreme and damaging the first round of tariffs would be, our lighter stock positioning and some exposure to international markets helped mitigate losses.
With reduced exposure to stocks, we were also positioned to take advantage of opportunities as markets fell. It’s too soon to know if we bought at the bottom—or if further declines lie ahead— but we added several new investments to client portfolios, focused on high-quality companies across various sectors. It’s often when headlines are darkest that stock valuations become most attractive. We bought into a bleak economic outlook and growing anxiety. Historically, this has been a good entry point—though it never guarantees short-term success. Volatility remains high, and declines could continue. We continue to hold additional cash for potential future buys.
The bond market was whipsawed by the countervailing concerns over recession and inflation. Slowing economic data and recession fears led many to seek safety in bonds, while worries over the inflationary effect of tariffs led to an exodus from longer-term bonds. Bond investors were bewildered by almost daily pronouncements about tariffs that were often followed by revisions and delays of implementation. Given the confusion, investors moved away from longer-term bonds and into cash and shorter-term paper. The bond ladder we have structured for clients is generally shorter-term with one longer-term bond that carries full inflation protection.
