Few terms in recent memory have moved from the dusty confines of history books to dominating news headlines like “tariff.” Certainly, that’s been the case in the buildup to this week’s announcement by the Trump administration of a sweeping set of tariffs encompassing most of America’s trade partners. That development has far-reaching implications for the global economy and financial markets. The broad application of these tariffs, including the baseline 10% levy on all imports and higher rates for specific countries, marks the largest such increase in over a century.
Heading into the announcement, details were scarce, but the general sense was that they’d be substantial. That proved to be true, although the actual levies were even higher than most had anticipated. That surprise was the catalyst for Thursday’s stock selloff and flight to quality by investors.
New tariffs: The details
All countries will face a minimum tariff of 10% on all imports, even those countries with whom the U.S. runs a trade surplus. Countries with whom the U.S. runs trade deficit in goods will face a “reciprocal” tariff. Notably, services were excluded from the calculations. These “reciprocal” tariffs range from an additional 34% on China (totaling 54% of increase YTD), 20% on the European Union, 24% on Japan, 26% on India, and higher tariffs on parts of Southeast Asia. In total, the White House announcement listed 180 countries affected by these tariffs.
While economists and analysts are still crunching the numbers, estimates appear to be settling into a range of an effective tariff rate of about 25%, which would mark the highest level of import taxes in over a century.
For our readers who may be interested in a more detailed look at the specifics of what was announced, we’d direct you to Plante Moran’s resource page, which is being updated by industry experts across the firm as developments warrant.
The case for and against tariffs
A vigorous debate is unfolding between policy analysts and economists over the effectiveness and risks associated with the administration’s strategy. Few would argue that it’s not a high-stakes approach to attempt to address the persistent and growing trade deficit and, to a degree, the federal deficit. It also squarely takes on tariffs and barriers to trade that have been erected by America’s trade partners, arguably diminishing the ability of many U.S. businesses to compete abroad.
At the same time, most economists agree that tariffs are ultimately a tax on consumers and/or businesses that will bear much or all of the additional costs. The imposition of tariffs also raises the risk of a prolonged, global trade war. In the near term, it also brings the probability of higher prices, slower growth, and stagflation (a combination of higher inflation and slower growth), and increases the probability of a recession.
Whether or not this policy and approach will ultimately lead to a favorable renegotiation of various trade pacts with the targeted countries, the elimination or lowering of various trade barriers targeting U.S.-based companies, or a meaningful reduction in America’s trade deficit, remains to be seen. Notably, the most significant development today was the announcement by China that it would respond with an additional 34% tariff levied against all imported U.S. goods, along with restrictions on exports of rare earth metals that are critical components in a variety of goods related to the defense sector, electric vehicles, and other electronics.
For now, the focus is squarely on the near-term risk and the growing uncertainty about what the latest round of tariffs will mean for the economy. There’s a growing risk that consumers will pare back spending (perhaps out of caution, perhaps out of necessity) and that businesses will strike a much more judicious stance in hiring and capital investment.
Put simply: There are still more questions than answers. It’s not just the tariffs that create uncertainty; the rules of trade have changed. Still, it’s not clear what those rules will be or how much they may continue to evolve. Are tariffs being used predominantly as a negotiation tactic to potentially secure more favorable trade deals with economies around the world? How long will they be in force? How will other countries respond? When will the tide turn from a battle over trade to negotiation and potential resolution?
As the situation continues to evolve, it will be crucial to monitor the responses of trading partners and the potential for further escalation in trade tensions. The long-term effects of these tariffs will depend on a wide range of factors, including the ability of businesses to adapt to higher costs and adjust supply chains, and the overall resilience of the global economy. In the meantime, the immediate impact is one of increased uncertainty in the outlook and heightened economic risk.
It’s those questions — and the resulting risks — that have dominated headlines in recent days and has been the primary focus for investors.
Market reaction: Investors seek safety.
As we write this, various U.S. stock indexes are trading sharply lower for the second straight day, as investors continue to recalibrate their expectations. International markets also declined overnight, reinforcing the global impact of the changes in policy and sentiment, and resulting economic ripple effects for and responses by other countries. Crude oil prices have dropped by nearly 20% in two days, consistent with expectations for lower demand associated with a slowdown in economic activity.
The flight to quality has driven Treasury rates lower, with the benchmark 10-year Treasury yield declining below 4% today for the first time since early October last year. Credit spreads have also widened in recent days, a sign that the risk-off mood most notably evident in stocks is also seeping into other risk assets.
Notably, the futures market is now pricing in a greater than 75% probability that the Federal Reserve (Fed) will cut its short-term policy rate by at least 1% by the end of 2025. Just a week ago, that probability stood at 32%. That change reflects a notable dimming in sentiment in the near-term outlook for economic conditions.
That doesn’t mean the Fed is ready to deliver aggressive rate cuts. In a speech earlier today, Fed Chair Jerome Powell acknowledged that he expects the announced tariff package to push inflation higher and weigh on growth, while reiterating that the Fed will wait to see what the actual impact is before taking action. In their March projections, Fed policymakers reaffirmed their forecast for two quarter-point cuts before 2026. It remains to be seen if recent developments ultimately push the Fed to move more aggressively or if investors will be disappointed by the Fed’s willingness and ability to slash rates.
Recent market volatility is a reminder that sentiment — and its direct reflection in stock prices — can change quickly, even before the cause for investor anxiety is realized in hard economic data.
Closing thoughts
In recent weeks, we’ve published multiple pieces that provide context around recent events and more broadly about periods of market volatility in general. For those that might have missed them, we’ve included the links below:
One concern that we’ve heard mentioned periodically is that “this time is different” and that we’re in new territory. We agree with that observation. The specific conditions that have reintroduced volatility to the capital markets and raised questions about the near-term economic outlook are unique. At the same time, we’d also remind investors that it’s the same refrain that has played out many times over the course of time. The near shutdown of the U.S. economy in the early stages of the COVID-19 pandemic was unlike anything we’ve seen in our lifetimes; the response by the federal government, the business community, and Americans collectively was unprecedented as well. The Global Financial Crisis marked perhaps the greatest risk to the financial system and global economy since the Great Depression. The events of 9/11 impacted the American psyche with long-term implications that continue to color aspects of American life and foreign policy to this day. In each case, the stock market was hit hard. In each case, it ultimately turned the corner, a new bull market began, and stocks were lifted to new highs.
We agree that this time is different. Every time is different. The next time will be different as well.
What hasn’t changed over many decades though is the durability of market cycles, the emergence of opportunities born out of periods of uncertainty, and the long-term benefits that accrue to investors that are willing and able to stay the course, remain invested, and take risks. That doesn’t mean that periods of volatility can be avoided or that uncertainty — whatever the cause — won’t create difficult periods for investors to navigate. We have entered one of those periods again. We fully believe that the markets will, in time, move through this period of risk and volatility as well.
As always, we’ll continue to monitor developments and market conditions and consider what changes, if any, will be appropriate in portfolio positioning. Please don’t hesitate to reach out to your PMFA relationship manager with any questions or concerns.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
