On April 2, President Trump announced new tariffs on nearly all major trading partners. These tariffs are “reciprocal” in that they correspond to tariffs each country imposes on U.S. goods and are on top of previously announced duties.
The average tariff rate across countries is 25%, with rates for some as high as 49%. While the implementation of these tariffs was widely telegraphed by the White House, the level and scope are greater than many investors and economists expected. The immediate market reaction was negative, with the S&P 500 declining over 3% and the 10-year Treasury yield declining to around 4%.
The newly announced tariff measures have been set at a minimum 10% rate, with levels varying based on the U.S. trade deficit with each country. For countries where the U.S. has large trade deficits, the president has introduced even higher tariffs: 20% on EU goods, 46% on Vietnam, 24% on Japan, and 26% on India. Imports from China, which already faced a 20% tariff, will now be hit with an additional 34%—bringing the total to 54%. There are some positives, though. Certain products like autos, steel, aluminum, pharmaceuticals, and chips won’t face these higher tariffs for now. Also, Canada and Mexico won’t see new tariffs beyond the 25% tariffs announced back in March. The carve-out for USMCA-compliant goods will stay, and tariffs could drop to 12% if there’s progress on border security and fentanyl flow. This is significant given the strong supply chain ties between the U.S., Canada, and Mexico.
How does this affect markets and companies? It will take time to truly understand the impact, although some areas will be affected more than others. If these tariffs stay in place, we might see slower economic growth, higher inflation, and a weaker job market. In response, the Fed might cut interest rates sooner than expected. The president has left the door open for talks if other countries make moves to fix trade imbalances and align with the U.S. on key economic and security issues. Plus, tax cut discussions are kicking off to help soften the impact of these tariffs.
While the outlook may seem grim, it’s important to remember that markets can be fragile in the short run but are resilient in the long run. Over the past century, markets have experienced significant global economic shifts including wars, recessions, bubbles, pandemics, political change, and technological revolutions.
Our portfolios are constructed to weather times like these, drawing on the fundamentals of investing: diversification, rebalancing, and ensuring allocation to assets across multiple areas of the market. International equities had positive returns in Q1, one of the best relative returns in the last 30 years, more than offsetting declines in US equities. Fixed income returns have been positive, too. To put the current market level into perspective, the S&P today is where it was in August of 2024, and is up over 100% since March of 2020. We have seen this type of volatility before and while it continues to be shocking, we believe this will be temporary.
Having the fortitude and discipline to stay invested and stick to a personalized financial plan is a key principle to long-term financial success. When confronted with market volatility and economic distress, the key is to focus on what you can control: maintaining adequate levels of emergency cash, creating a financial plan which takes volatility into account, rebalancing your portfolio to take ad- vantage of attractive valuations, and recognizing the flip side of lower yields, which is a lower cost of debt financing.
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