4.3.2025

Markets are responding negatively to yesterday’s “Liberation Day” tariffs announcement.

The punitive nature and economic risk of the announced tariffs is driving markets lower today. Tariffs increase the risk of stagflation. Typically, less economic activity means less demand and lower inflation. In the case of tariffs, lower economic activity and higher inflation can happen concurrently.

For decades, companies built highly efficient global supply chains which helped keep inflation low. Reversing these supply chains takes time and forces companies to make less efficient choices. The result is higher prices for consumers and higher inflation.

Currently announced tariff policies look very restrictive. If fully implemented, some estimates suggest the tariffs could reduce US GDP growth by 1-2%. In 4Q24, the economy grew 2.4%, so this estimated reduction points to a deceleration, but not necessarily a recession.

Source: Newsweek. *Includes currency manipulation and other trade barriers.

On the surface, the announced tariff policy seems simple: take another country’s restrictions on US goods and cut it in half. But there’s no clarity on how exactly the administration accounted for non-tariff barriers or currency manipulation.

There are plenty of unknowns. As we dissect the news-flow, here are some questions we’re asking:

• What stimulative policies might follow?
  • Will the administration use tariff revenue to fund tax cuts?
• How will consumers and businesses respond?
  • Nothing happens in a vacuum. The spending decisions of consumers and businesses will ultimately drive the economy.
• How will other countries respond?
  • Will countries retaliate with their own restrictions and escalate the situation?
  • Will other countries negotiate to reduce tariffs?
• How exactly will these tariffs be applied?
  • Exceptions for certain categories or industries might help companies avoid the published rates.
• Why were Canada and Mexico not mentioned?
  • The two largest trading partners were notably absent from President Trump’s posterboard.
• How long will these tariffs stay in place?
  • A month ago, President Trump reversed course on Canadian and Mexican trade restrictions in just 24 hours. This could happen again.
  • The longer the tariffs stay in place, the more harmful they will be. Many businesses advanced purchases and built inventories ahead of yesterday’s announcement. This provides a short-term cushion.
  • Midterm elections are 20 months away. The Republicans have a thin majority in the Senate and the House. Pushing the economy into a recession doesn’t help reelection odds. Already, we’ve seen four Republican Senators break ranks in opposition to the administration’s tariff policy.

So, what’s an investor to do?

Remember that volatile periods like today are why maintaining a balanced portfolio is so important. Falling interest rates are driving bond prices higher, offsetting some of the pain from equities. Alternative investments can also provide ballast to portfolios during times of market stress.

Following two strong years of high double-digit returns, the S&P 500 is down about 12% from its all-time high in February. We’ve said it before, and we’ll say it again: market corrections happen frequently. We don’t earn a return by trading around these corrections, we earn our return by holding through them. Staying focused on your long-term financial plan and maintaining your allocations is critical.

This story is changing by the hour. We’re staying abreast of the latest developments but also stepping back to understand the bigger picture. We are not high-frequency traders looking to jump in and out of markets, but we will take advantage where there appears to be an overreaction. We’re watching this closely and our investment committee is staying in close contact as we navigate these markets.

Disclosure:  Unless stated otherwise, views, opinions or forecasts expressed in this blog are those of the author and do not necessarily reflect those of the Adviser and/or its employees. The contents of this blog are distributed for informational purposes, and are not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Nothing in these communications is intended to be or should be construed as individualized investment advice. All content is of a general nature and solely for educational, informational, and illustrative purposes.

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