Trump's Tariffs: What It Means For Markets and Your Portfolio

The Trump administration recently made its long-anticipated announcement on reciprocal tariffs, and the details were significant. A minimum 10% base level tariff will apply to every country, with higher rates for countries based on the tariffs they charge us and other trade barriers they impose.

These levels should represent the “ceiling” of tariff rates and could be negotiated down - but this will depend on whether other countries make concessions or escalate further. China has already announced they will match these new tariffs, while other nations have struck more conciliatory tones.

Market Reaction

Markets had hoped for a clearing event - something that would signal the worst was behind us and provide clarity on the path forward. That clarity hasn't arrived.

We remain in a global game of “chicken” with very little visibility into what the trading landscape will look like in three months, let alone long-term. What's clear is that the administration didn’t hold back with this announcement and continues to take an extremely tough stance on trade.

Markets are getting increasingly convinced of how far this administration is willing to go to combat perceived trade inequities. Many investors had hoped for signs of de-escalation, but the recent announcement showed they aren't ready to back down in any way or form right now.

Market and Economic Impact

The administration has made it clear that the stock market is not their priority. Indicators they’ve said they care about, like the 10-year yield (which drives mortgage rates) and oil prices are down - though not necessarily for the right reasons.

The President feels emboldened by his election mandate and a relatively healthy U.S. economy compared to the rest of the world. This gives him leverage to play hardball in trade negotiations. Our trading partners have more to lose than we do, but we are gambling that they will cooperate - if they don't, market problems will persist.

While corporate decision-making and consumer confidence may be affected, we haven't yet seen this translate meaningfully into economic data. Recent manufacturing PMI beat expectations, and the latest jobs report came in above forecasts. The administration will likely feel they can hold their tough stance as long as economic data remains benign.

Recession Risk

It’s important to emphasize our starting point: unemployment remains low, balance sheets (both consumer and corporate) have been healthy, and credit markets remain open despite higher interest rates. 

One thing we’re watching closely is credit spreads. These represent the level of additional return lenders demand relative to “risk-free” U.S. government debt when they are making loans to corporations. Credit spreads signal how much risk lenders are willing to take and are often better indicators of economic health than stock market performance.

Credit spreads for higher quality companies (“investment grade” corporates) have not widened as much as they typically do during times of economic stress.

Spreads for more risky companies (represented by the “high yield” market) have also widened from recent lows but still remain below long-term averages.

The credit markets are not signaling a recession yet, but these are indicators we’re watching very closely.

Potential Mitigants

One unique aspect of this period of volatility is that it’s being driven by the policy actions of our own government – both from the administration attempting a massive overhaul of international trade and the Federal Reserve which has been keeping interest rates restrictive to fend off inflation.

If the economy starts contracting quickly due to inflation or uncertainty, and unemployment starts moving higher, we think it’ll be much more difficult for the administration to continue down this path with abandon. The average American cares more about having a job and affording necessities than they do about the stock market. Congressional Republicans are already facing pressure from their constituents, increasing the urgency of delivering pro-growth policies to offset the potential negative tariff impacts. 

The Fed is also watching economic conditions closely to determine their interest rate policy. Near-term inflation spikes from tariffs may complicate their job, but they've indicated they view tariff-related price impacts as transitory and are focused more on growth. Unlike in 2022, when rates were already low and inflation was much higher, the Fed now has capacity to stimulate the economy if needed.

Some market participants now think we could see an “emergency rate cut” as early as this week. We think that’s unlikely but recognize that both the administration and the Fed have tools to prevent serious economic pain – whether they use them and when is still to be determined.

Market Outlook

US stock market weakness could continue, regardless of whether or not the economy enters a recession. Nearly 50% of bear markets over the last century occurred without a recession. We haven't reached the point of "full capitulation" where valuations become so attractive that investors feel compelled to buy despite uncertainty. We may start approaching that inflection point 10% below current levels based on historical valuation data.

Global capital flows independent from economic performance can also influence market returns. International investors entered the year owning a record high share of US financial assets (nearly 20%). As policies emerge to reduce trade imbalance, foreign demand for US securities could decline if other nations feel less inclined to hold dollar-denominated assets.

What This Means For Your Money

For individual investors, reacting by trying to time the market or making wholesale portfolio changes based on recent events has not proven to be an effective strategy. The data consistently shows that investors who try to jump in and out of the market based on news events or short-term volatility typically underperform those who stay the course.

The Power of Diversification

The best approach in times of uncertainty is to maintain a properly diversified portfolio aligned with your long-term financial goals. This isn't just theoretical advice - we're seeing it play out in real time:

• Portfolios with meaningful exposure to bonds are benefiting from the flight to safety
• International equity exposure is providing a buffer as global markets react differently to trade tensions
• Different sectors within the U.S. market are experiencing varying impacts from tariff news

By spreading your investments across different asset classes, you ensure you have some exposure to parts of the market that are outperforming while reducing the impact of volatility in any single area of the market.

Focus on What You Can Control

Rather than trying to predict market movements, focus on the elements of investing you can control:

• Maintaining appropriate asset allocation based on your time horizon and risk tolerance
• Minimizing investment costs and tax impacts
• Making consistent contributions to your investment accounts
• Rebalancing periodically to maintain your target allocation

These proven principles of sound investing become even more important during periods of market stress.

Looking Forward, Not Backward

Market drawdowns have happened throughout history and will continue to happen. As recently as 2018, we saw a market correction due to tariff announcements. What's important to remember is that markets have always recovered, though the timing is unpredictable. By maintaining a long-term perspective, you can avoid the emotional decisions that might cause you to miss the eventual recovery when it comes.

Rest assured, our team at Range is monitoring these developments closely and positioning client portfolios appropriately for this environment. If you have specific questions about your investment strategy, please don't hesitate to reach out.

Taresh Batra
VP of Investments, Range