Market Response to President Trump’s Reciprocal Tariff Policy
April 03, 2025
Today’s equity market selloff and the accompanying rally in bonds is clearly a reaction to President Trump’s reciprocal tariff policy announced last night from the White House Rose Garden. The tariff program is wide and far reaching, which has caused much uncertainty with investors. Prior to the announcement, investors hoped for a more nuanced and tactical approach with more exceptions possibly.
However, we expect the tariff rate structure announced yesterday is merely a baseline for further negotiation, and that ultimately a more strategic and beneficial policy will evolve.
As it stands, there is a gap between higher costs and consumer prices, which will be incurred immediately, and any future benefits from the onshoring of factory production. And in the interim, without tariff relief, there will be pressure on both sales and input factor costs, which will shrink corporate profit margins and lower earnings per share.
At the beginning of this year, the stock market was expensive, and inevitably some catalyst was needed to rationalize stock prices. Tariffs turned out to be that catalyst. After a long running bull market, corrections are normal. So far, this correction is modest by historical standards, and the market bottom will be a function of investor perceptions about economic progress and how that translates to earnings, jobs, interest rates, inflation, and currency exchange rates. Interestingly, the short-run impact of tariffs to date seems to be lower interest rates and a weaker dollar, which may be beneficial in the longer run to support foreign sales and lower financing costs for corporations and the US Treasury.
With mid-term elections seemingly always around the corner, it will be incumbent on the Trump administration to demonstrate economic progress in the not-too-distant future. This makes us optimistic that tariff policy will necessarily evolve in a way that is pro-growth and supportive of US based companies in the longer-run, and that will become more obvious with refinements to policy. During these periods of uncertainty, it is important for investors to stick with their long-term plan and maintain diversification that is consistent with their individual goals and requirements. Our financial planning group is ready to assist clients with any questions or issues about their plan.
Market volatility and lower stock prices are hard to ignore and can be stressful, but it is always important to keep focus on long-term investment objectives. And in fact, stock market downturns can offer excellent long-term investment opportunities. Please reach out to your wealth advisor team if you have any concerns regarding the financial markets, economy, or your portfolio.
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