Weighing the cost of the “uncertainty premium” created by tariffs, spending cuts, stock valuations and more.
President Trump said yesterday, “I’m not even looking at the market,” which might be the best advice I can offer you this week as the administration’s on-again-off-again policy changes on everything from tariffs to government spending cuts has investors and America at large rattled.
Two days after imposing sweeping tariffs on Canada and Mexico, Trump on Thursday abruptly suspended many of those levies, sowing confusion with investors and businesses that depend on trade with the countries. The president said he would allow products that are traded under the rules of the U.S.-Mexico-Canada Agreement (the trade pact he signed in his first term) to skirt the stiff 25% tariffs he imposed just days ago, which he asserts are necessary to stem the flow of drugs and migrants into the U.S.
His decision came a day after granting a 30-day reprieve to U.S. automakers, who had complained that the levies would cause severe damage to their businesses. Trump implied that any relief would be short-lived, saying that other tariffs on Canadian and Mexican products are coming in April.
The administration’s chaotic, stop-and-start approach has sent stock markets tumbling and generated anxiety among industries that depend on trade with Canada and Mexico. The two countries together account for more than a quarter of U.S. imports and nearly a third of U.S. exports.
Turning to China, Trump placed a second 10% tariff on all Chinese imports, prompting another round of retaliation from Beijing on American products. The president has not suspended any of his levies on the country to date. Chinese foreign minister Wang Yi said China will continue to retaliate against “arbitrary tariffs” from the U.S. and that, “No country should fantasize that it can suppress China and maintain a good relationship with China at the same time.” On Wednesday, China set its GDP growth target for 2025 at “around 5%” and laid out stimulus measures to boost its economy amid escalating trade tensions with the U.S.
Meanwhile, Department of Government Efficiency (DOGE) decisions are in the spotlight as U.S. employers announced 172,017 layoffs for February, up 245% from January and the highest monthly count since July 2020, according to Challenger, Gray & Christmas. As a result, it is being reported that Trump has instructed Elon Musk to play only an advisory role going forward on cuts, with Cabinet secretaries ultimately making the final decision on staffing and policy for each department, using a “scalpel” rather than a “hatchet” or, presumably, the symbolic bedazzled chainsaw recently wielded by Musk.
In other labor market news, the U.S. economy added only 151,000 jobs in February, lower than estimates of 170,000. This report offers some reassurance, though, as it shows corporate employers are not yet dramatically slowing their hiring plans. The unemployment rate ticked up slightly to 4.1%.
The speed with which Trump has announced tariffs impacting our largest trade partners and the disruptions in various government agencies are of concern. But we knew the Trump agenda and that, as a result, this was likely to be a volatile year—and weathering uncertainty and volatility comes with the territory for investors in any given year. Equity valuations have less of a cushion for disappointment at present, and we are expecting further waves of uncertainty coming from an administration that wants to “move fast and break things.”
This type of sharp but contained selloff is entirely appropriate behavior for markets when undergoing this much upheaval. And, yes, many questions remain unanswered, including the impact of government layoffs and shutdowns, shifting international relations, regulatory changes and the topic of the week: tariffs.
If we knew for a fact that a permanent 25% tariff on all goods from both Canada and Mexico was going to be imposed, we believe much more of a selloff would be warranted. However, we agree with the broad, if vague, consensus that whatever ultimately happens with tariffs will be less impactful than the headlines predict, and certainly less impactful than the full 25% starting point.
While anything is possible, we believe that Trump’s focus on equity market performance as a referendum on his decisions (despite his claim to the contrary this week), along with our prior experience with tariffs in 2018 and 2019, means that there is more smoke than fire here.
It’s always worth remembering that, in the face of doubt, markets generally price in worse-than-realistic scenarios. Call it an “uncertainty premium”: When faced with new situations, markets tend to overreact, and probabilities are priced inefficiently. Though uncomfortable for investors, this typically means that the most profitable choice is to take the other side of panic.
To that end, and because of our view that we will avoid the worst-case tariff scenario, we think the most likely outcome for the near-to-intermediate future is a market stabilization. This selloff is unpleasant, but that’s also why we have advocated for rebalancing and embracing diversification with balanced positioning in 2025. It’s also yet another useful illustration as to why we think bonds are relatively attractive for the first time in so many years.
Please let us know if we can review your personal portfolio to help you through these times of uncertainty. Your team can work with you to reaffirm your positioning, liquidity and other needs so that you can make informed decisions based on your long-term plans and not because of the changing whims of Washington.
If you would like to speak personally with a member of your advisory team, please call 833.RWA.PLAN (833.792.7526).