Tariffs & the Market Response
April 4, 2023

Our View

Global equity markets have experienced a swift and significant pullback following President Trump’s announcement of a broad new round of reciprocal tariffs. The sudden nature and scope of the policy shift caught markets off guard, leading to heightened volatility and a sharp drop in stock prices. 

Federal Reserve's Monetary Policy Outlook

While some tariff escalation had been anticipated, the administration’s approach exceeded expectations. In addition to targeting average import tariff rates on U.S. goods abroad, the White House factored in currency effects and trade deficits—resulting in a more aggressive and complex policy stance than markets were prepared for. 

These proposed levies could add cost pressures for companies, potentially compressing profit margins. While some of those costs may eventually be passed on to consumers, others might be absorbed—posing possible headwinds for both corporate earnings and consumer sentiment. Some households may accelerate purchases in anticipation of price increases, while others could delay spending amid the uncertainty. Meanwhile, recent federal job cuts and falling asset values are already contributing to a more cautious tone in the economy. 

That said, the U.S. consumer remains in solid financial shape. In March, the U.S. economy added 228,000 new jobs, marking continued strength in the labor market. Wage growth remained healthy, and the labor force expanded modestly—helping to support consumer spending. That resilience provides a solid foundation, even as other areas—such as manufacturing activity and business investment—show early signs of softening. Importantly, more moderate growth is also putting downward pressure on inflation, which may pave the way for additional interest rate cuts from the Federal Reserve and help keep borrowing costs in check. Despite near-term pressure, U.S. companies remain fundamentally healthy and are positioned to deliver solid earnings over time—even under a higher tariff environment.

We may be near peak trade policy uncertainty. Historically, markets have struggled more with ambiguity than with bad news. Once greater clarity begins to emerge, equities often recover. For example, during the 2019 trade war under President Trump’s first term, the S&P 500 rallied 19% between August 23, 2019, and the pre-pandemic highs in February 2020. That recovery unfolded as the U.S. and China resumed negotiations, postponed tariff increases, and eventually announced a Phase One trade agreement. While no two market environments are alike, history reminds us that markets can rebound quickly once uncertainty begins to lift. 

While the economic impact of tariffs will take time to fully digest, potential policy offsets may follow. These could include tax cut extensions, deregulation, or negotiation-driven adjustments. Encouragingly, Canada and Mexico were not included in the latest round of tariff measures, signaling that discussions are already underway. It’s also a subtle but important indicator that—despite the hardline rhetoric—the administration may be open to negotiating with other trade partners as well. Additionally, some Congressional Republicans have begun to push back against the tariffs, signaling that further modifications could be on the table. All told, we believe the most severe announcements may be behind us—and a more measured approach could follow. 

Equity Markets Navigate Economic Uncertainties

In the meantime, there are areas of the market that have continued to offer stability. Bonds, often viewed as “flight-to-safety” assets, have held up well amid equity volatility. The Bloomberg U.S. Aggregate Bond Index is up approximately 3.5% year-to-date and has served as a valuable offset to stock market weakness. 

International stocks have also experienced some recent volatility but remain an important part of well-diversified portfolios. They have significantly outperformed U.S. stocks so far this year and are expected to continue to do so, supported by more attractive valuations, improving fundamentals abroad, and a weakening U.S. dollar that serves as a tailwind for foreign returns. 

While many U.S. sectors have faced headwinds, our factor-based approach to stock selection continues to emphasize exposure to high-quality, attractively priced companies—those with strong balance sheets, stable earnings, and durable business models. These are the types of businesses we believe are best equipped to navigate economic uncertainty and deliver long-term value. 

This is where diversification proves its worth. While technology and AI have led markets in recent years, maintaining a broader mix of assets—including international equities, fixed income, and alternative investments—has helped client portfolios better navigate this recent downturn by complementing equity exposure with assets that tend to behave differently in volatile markets. 

Looking ahead, volatility may persist as markets continue to absorb policy shifts. But we believe markets can begin to stabilize as uncertainty fades and fundamentals reassert themselves. 

As always, we are here to help you make sense of market moves and remain focused on your long-term plan. Please don’t hesitate to reach out with any questions or concerns—we’re always happy to hear from you.

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