Tariffs – April 3, 2025

April 4, 2025

The S&P 500 fell 4.8% today, its largest one-day decline since March 2020. While yesterday’s tariff announcement itself was expected, we think the main points of negative surprise were:

  1. The new tariff rates to be imposed were significantly higher than expected for most countries, with Fidelity estimating a rise in the effective US tariff rate from 3% to 26%, making it the highest since WWII
  2. There is still a great deal of uncertainty post-announcement. Specifically, we think there are still several key unknowns regarding tariffs:
  • What will the final tariff rates be by country? Treasury Secretary Scott Bessant yesterday indicated that the tariff rates announced yesterday were negotiable, and would not go higher unless a country introduced retaliatory tariffs. We think an interesting case to watch will be negotiations with Israel. On 4/1/25, Israel dropped all tariffs against the United States, but Israel’s new reciprocal tariff rate was listed at 17%, above the 10% global minimum. If an announcement is made that Israel’s tariff rate will drop to the 10% minimum, then this would be a positive sign that other countries can drop their tariffs against the US and get a lower rate as well.
  • Who will pay the tariffs? Tariffs are paid by one of three parties or a combination of all three: (1) the exporting firm accepting lower margins, (2) the importing firm accepting lower margins, or (3) the consumer paying higher prices. How this split occurs will likely vary by country, industry, and company, but it has large implications for both corporate profits and inflation.
  • How quickly can companies shift their supply chain to avoid tariffs? Ideally (and this is President Trump’s primary goal), companies will shift their manufacturing to the United States to avoid tariffs. However, it takes time to build factories and move supply chains to the US or another low-tariff country, if it is possible to relocate at all. The worry is that, assuming the tariff rates remain as high as announced yesterday, the economic pain incurred before companies can adapt will be significant.

As mentioned in our March 4 blog post, policy uncertainty can lead companies and consumers to hold back spending, hurting economic growth. The reciprocal tariffs are scheduled to go into effect on April 9, so we are hopeful that significant negotiations and announcements will take place during this upcoming week, lowering tariff levels and alleviating some of the uncertainty.

Some positive things to keep in mind:

  • Tariffs are likely to increase inflation over the next year. However, assuming stable tariff rates, this would be a one-time (not ongoing) rise in the price level. The Federal Reserve recognizes this and is thus still expected to cut interest rates several times by the end of the year, which should help stimulate the economy.
  • In addition to tariffs, President Trump campaigned on market-friendly platforms such as deregulation and tax reform. It may be a matter of timing that tariffs were the first item to focus on, and thus the market can look forward to announcements cutting regulations and lowering tax rates. Importantly, the revenue raised from the tariffs, combined with government cost-cutting efforts, could give the US government significant firepower to spend the form of tax cuts, infrastructure spending, etc.
  • Multiple investor sentiment indicators are already near levels of max pessimism. As uncertainty diminishes, the effect of investors becoming more optimistic should be positive for equity markets.

Bottom line:

Market volatility will be elevated near-term until we have more clarity, and there are both optimistic and pessimistic scenarios that could plausibly unfold from here. We highly recommend staying the course during these times of max uncertainty, focusing on your long-term plan, and keeping your portfolio intact. The market has experienced many 10%+ drawdowns in the past. At the bottom, things can look very grim, but each time the market has eventually come roaring back.

Diversification continues to be our top plan to navigate the current environment, with international markets being a key focus. We understand that some companies we own will do very poorly if the current tariff rates remain in effect. At the same time, we do not recommend selling these securities as they are likely to be our top performers in the scenario where negotiations prevail and tariff rates are lowered. Please contact your GGS advisor if you have any questions regarding how this situation impacts your personal situation or any companies in your portfolio.

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