The aftermath of ‘Liberation Day’ tariff policy and why we diversify.
On the train ride home from work last night, I turned my playlist to Johnny Cash and the soothing sound of his gravelly bass-baritone: “I fell into a burning ring of fire/I went down, down, down/And the flames went higher/And it burns, burns, burns/The ring of fire/The ring of fire.”
There is a ring of fire around the markets right now that is burning up investor, consumer and business confidence, thanks to the administration’s impetuous approach to tariffs that one market strategist likened to the policymaking equivalent of a suicide bomber.
To recap, in a Rose Garden speech at the White House on Wednesday, President Trump signed an executive order implementing a minimum 10% tariff on all imports that will go into effect on April 5, and additional individualized reciprocal tariffs on imports from 60 countries that, in some cases, will exceed 50%. The additional tariffs will take effect on April 9.
Following the president’s announcement, the White House released a list of the new tariffs on imports from 185 countries and territories. While the 20% tariffs on imports from the European Union and 10% on U.K. imports were not necessarily surprising given what had been previewed, tariffs on Asia were much higher than anticipated, including a 54% tariff on Chinese imports, 46% on products from Vietnam and 32% on Taiwanese goods. Other tariffs on automobiles, steel and aluminum remained at the 25% level previously announced, and more are foreshadowed on pharmaceuticals and semiconductors next week.
As of this morning, China has hit back with a 34% tariff on all products imported from the U.S., escalating the trade war between the world’s two biggest economies.
Tariffs are not paid by foreign countries. They are paid by U.S. companies and passed on to all of us consumers in the form of higher prices. Some estimate these tariffs will cost the average household an additional $2,100 a year on already strained consumer budgets.
Markets were hoping the threat of tariffs was a negotiating tactic, and it is notable that the executive order signed by Trump specifically gives him the ability to reduce tariffs if a country negotiates or takes other steps to reduce its trade barriers. Indeed, the president has already opened the door to adjusting this approach. Speaking with reporters on Air Force One, he said he was willing to reduce tariffs if other countries offer something “phenomenal” in negotiations, or if China approves the TikTok sale.
Will the April 2 “Liberation Day” announcement represent peak tariffs and therefore peak market angst? We cannot say for sure. No question that Trump has a history of making rapid policy changes, and it would not be surprising to see a series of alterations in country-specific tariffs as negotiations continue.
Even as tariff controversy swirled, the president was also out making a push for the Senate to show progress on a tax bill that promises $4.5 trillion in tax breaks and $2 trillion in spending cuts. However, the political environment to pass such legislation is uncertain, and the public’s appetite for steep budget cuts is being tested in real time, with Elon Musk’s Department of Government Efficiency (DOGE) blazing through federal offices, firing thousands of workers and shuttering long-running government mainstays—from scientific research projects on diseases to educational services for schoolchildren to offices that help with Social Security, tax filing and the weather.
There are also real concerns that it is mathematically impossible to achieve the spending cuts needed without attacking Medicaid or Medicare, as well as SNAP (Supplemental Nutrition Assistance Program). And with the national debt now exceeding $36 trillion, making tax cuts permanent in addition to offering new tax relief on Social Security benefits, overtime pay and tips, as well as restoring the State and Local Tax (SALT) deduction, may set the stage for a level of U.S. debt that is just too high for Congressional fiscal watchdogs, credit rating agencies and financial markets to swallow.
This morning, a backward-looking employment report showed better-than-expected job gains of 228,000 in March, though unemployment ticked up to 4.2%. A report from Challenger, Gray and Christmas, a global outplacement and executive coaching firm, reported a 60% increase in job cuts between February and March (a level similar to the early days of the pandemic) thanks to DOGE. Following this week’s tariff announcements, many large companies are out on the tape reporting hiring freezes, while automakers like Stellantis and retailers like Target and Best Buy are notably halting production and announcing job cuts.
Following a miserable week on Wall Street, investors want reassurances, and at the moment, those remain elusive. We experienced the worst single day of trading since the pandemic on Thursday. The S&P 500 Index is down more than 13% since the final session before the inauguration and off 15% from the February 19 all-time closing high of 6,144. Expectations of interest-rate cuts have surged, but Federal Reserve Chair Jerome Powell reiterated today that this is not in the Fed’s current plans.
We want to reiterate that we maintain well-diversified portfolios that invest with global exposure across various business models and industries. Diversification is working this year, as international markets continue to outperform the U.S., even in weeks like this one. And within the U.S., it is not all bad news, as certain defensive sectors like health care are significantly outperforming. In the strategies we manage and the funds we recommend to clients, this sell-off is creating opportunities for skilled stock pickers to add real value in portfolios. Plus, bonds are doing their job as buffers to stock-market volatility, with positive results across virtually all segments.
It is hard to resist the desire to make drastic changes to your investment plan when markets experience a bout of volatility at this level. Time and again, history has shown us that perseverance pays. This was also true a year ago, when markets were surging and it was very hard not to pile blindly into a handful of technology stocks and instead stay true to holding diversified assets like cash, bonds and international stocks.
This morning on my train ride, my headphones were filled with Cash’s familiar croon about staying true: “I keep a close watch on this heart of mine/I keep my eyes wide open all the time/I keep the ends out for the tie that binds/Because you’re mine, I walk the line.” In these tumultuous times, we may be living on a razor’s edge but a clear-eyed view of your financial plan and a steadfast commitment to your goals are what is needed to keep your balance. Slow and steady wins the race.
If you would like to speak personally with a member of your advisory team, please call 833.RWA.PLAN (833.792.7526).