Hitting the Tariff Button
What happened last week?
Tariffs to protect US industry from competition and collect tax revenue would generally move the US toward an economic model most prevalent in Emerging Markets economies. These are generally not known for their economic success.
While the tariffs won’t dominate all that matters in the US and world economy, in the present case, there’s also a transition cost to consider in the form of retaliation. We suspect losses of US exports, higher input costs for domestic producers and the pass through to consumer demand will, when all is tallied, weaken US manufacturing employment compared to where it would otherwise be.
3 Things to Know
Market Reaction Has Not Slowed Tariff Announcements
Perhaps we were putting it too nicely last week: “the world is waking up to a torrid pace of change in US policies under the new administration” (Please see Investment Strategy Bulletin Mar 8, 2025). After Ontario’s decision to slap a 25% tax on US electricity exports, US President Trump said he would raise Canadian steel and aluminum tariffs to 50% from 25%.
The tariffs, of course were put on pause for further negotiations. But are tariffs, as an idea, negotiable? From the President’s comments, it doesn’t sound like it.
April Deadline May Not End the Uncertainty
Market prices are attempts at predicting the future.
They constantly adapt to incoming information that influences the prediction. Bull and bear markets tend to exaggerate the ultimate reality.
We believe the Trump administration’s April 2 “reciprocal tariff” announcement date in just over two weeks, coupled with negative market dynamics, will lend itself to high levels of apprehension, possibly exaggerated apprehension. If so, opportunities will present.
As we are all attempting to understand the new Trump administration’s policies and whether or not they will adapt and change, we need to be open minded to the risks and opportunities, humble in what we don’t yet know.
Tariffs are one fundamental policy change. Deregulation is another. But the scope of the setback in overall US equity market has been less than one annual standard deviation (-12%). The spike in implied volatility and other metrics does not suggest a collapsed equity market.
At the same time, credit markets haven’t suggested a break down in the capacity of firms to service debt. This would come if markets believed tariffs set in motion a self-reinforcing collapse in the economy.
The absence of such a dynamic remains our base case view, but one that is challenged if the international trade discord develops into a much more severe supply shock. We will keep this in mind as we calibrate new policies and the market reaction.
US Economy Likely to Weaken in the Coming Quarters
Where asset prices are in two weeks, what the administration announces, and how the US and world economies respond, will help determine opportunity and risk. We can’t pre-judge this yet. It is true, however, that valuations of some desirable long-term assets are lower now than at recent peaks.
US software shares – with light tariff and retaliation exposure while providing key ingredients for the future of AI and cybersecurity – have erased all of their late 2024 rise. Their roughly 20% drop is equal to the drop in US retailers.
Yet US retailer profits are far more impacted by tariffs on consumer goods imports and any related economic weakness to come.
With the bulk of tariff impact to hit US profits in 2Q 2025 and any negative economic impact in that period and beyond, we expect many exposed firms to guide down future profit forecasts. At the same time, that’s what falling share prices anticipate.
With this said, we don’t believe investors should be betting on unpredictable trade developments. If investors are underweight equities relative to their target allocation and take a long-term time horizon, both domestic and international dividend growers have demonstrated balance sheet capacity to withstand shocks.
See our weekly CIO Strategy Bulletin for more details