by Alex Harding, CFA
Vice President
Equity Research and Portfolio Management
Although it may feel like yesterday’s news after Wednesday’s tariff announcement, Monday marked the close of the first quarter of 2025. It was a volatile three-month period in the capital markets; the S&P 500 index, propelled by the prospects of a pro-growth agenda, reached a new all-time high on February 19. Shortly after, domestic stocks reversed course and sold off by 10% as trade war escalations flipped investor sentiment from optimism to fear. While the S&P 500 index finished 4.3% down for the quarter, investors with a diversified portfolio of stocks and bonds fared much better as bonds ended in positive territory – providing the “insurance” component we’ve been highlighting during our 2025 Investment Outlook season.
On Wednesday afternoon, the fears of aggressive tariff policy became reality, with President Trump announcing 10% universal tariffs and “reciprocal” tariffs on countries with large trade deficits. The 10% universal tariff takes effect this Saturday, April 5, and the “reciprocal” tariffs take effect on Wednesday, April 9. While the situation is highly fluid and subject to change, the tariffs announced are undoubtedly more severe than anticipated. The U.S.’s two largest trading partners, Mexico and Canada, were spared from the universal tariff but both countries still face tariffs on exports not covered by their free-trade agreement. In addition, some goods, such as pharmaceuticals, semiconductors and lumber, are temporarily excluded from tariffs.
We put “reciprocal” in quotations because the country-specific tariff rates announced are not based off the tariff countries’ charge on U.S. imports. Instead, the administration based tariff rates off of a formula that divides the U.S. goods trade deficit with a country by the amount of the country’s total imports into the U.S. Then, the administration provides a “discount” cutting the rate approximately in half to determine the “reciprocal” tariff. This crude approach, if enacted as proposed next week, is estimated to bring the U.S. weighted average tariff to around 25%, exceeding the levels the Smoot-Hawley Act put in place in 1930 (chart below). To further frame the severity of the proposed tariffs, the research firm, Strategas, estimates the tariffs would generate around $620 billion in annual revenue, which is nearly $100 billion more than the U.S. Treasury received from corporate taxes last year or the equivalent of a 10% increase in the corporate tax rate.
While implementation is less than a week away, negotiations continue as the administration has implied the levels of the “reciprocal” tariffs could move lower if concessions are made. Retaliation from trading partners is another factor that could lead the administration to reach their pain threshold more quickly. Regardless of those outcomes, it’s clear the administration is focused on reducing the U.S. trade deficit, reshoring manufacturing jobs back to the United States and using tariff revenue to offset tax cuts for individuals and corporations.
As a result of the higher-than-expected tariff policy, investors fled risk assets with U.S. stocks, selling off more than 4.5% on Thursday – it’s worst day since March of 2020. As of this writing, global stocks are down another 4% in response to China’s retaliatory measures. In such an unpredictable environment, with changes occurring on a weekly basis, we are not making any major asset allocation changes. It’s our belief the tariffs will end up lower than the levels announced this week, and the economy will avoid recession, but our guard is up as the current proposal would have severe economic consequences if implemented.
A key tenet of our thesis on the economy is the health of the U.S. labor market. On Friday, the March Jobs report was better than expected, adding 228,000 jobs versus expectations of 140,000 driven by strong gains in the private services sector. The unemployment rate ticked up 0.1% to 4.2%, due to more people entering the workforce. More importantly, a timelier indicator we monitor for signs of stress in the labor market, weekly jobless claims, are not sounding any alarms and rangebound around 220,000. However, we acknowledge there may be a delayed effect from the federal layoffs due to severance packages.
Takeaways for the Week:
The magnitude of Wednesday’s tariff announcements was much larger than expected, catching investors off guard worldwide.
The current tariffs could have severe economic consequences. We expect negotiations and concessions to occur from both sides.
In response, investors aggressively sold risk assets with the S&P 500 down more than 10% from Wednesday’s close.