Key Questions: Liberation Day: What Happened? What’s Next?

Wednesday, April 2, 2025, US President Donald Trump announced new tariffs far greater and far broader than anticipated. As a result, and in brief, the impact associated with the president’s new trade policies may potentially cause short-term inflation to rise, economic growth to slow, recession risks to increase, and the geopolitical environment to be altered, possibly for decades to come.

Moreover, investors, who naturally crave certainty, were served with more uncertainty which has the possibility to create additional economic pressure and will likely further weigh on financial markets in the near-to-medium-term.

There were some silver linings, and because we continue to view this largely as a “man-made problem,” there are “man-made solutions¹.” While we don’t believe an abrupt reversal in the president’s thinking is imminent (at least in the short run), there could be a moment when his trade policies are adjusted and/or more market-friendly policies are brought to the fore, most likely with little advance notice.

It is our opinion, therefore, that investors should resist temptation from making wholesale changes to their portfolios given how fast the Trump administration’s policies tend to change. Having ample liquidity to fund near-term lifestyle or, in the case of an institution, operating needs is paramount. With Thursday’s sell-off, it is worth revisiting these obligations and ensuring they can be fulfilled with a high degree of certainty and are perhaps immunized from financial market gyrations altogether.

Longer-term oriented portfolios should maintain allocations in line with their policy portfolio weights. Based on recent market action, this could suggest that preservation assets, such as bonds, be reduced and growth assets, such as equities, be increased. We don’t think we are at this point yet, but we are closely watching indicators we have developed to signal potentially advantageous entry points.

Above all, what this year has underscored is the critical importance of diversification in order to achieve one’s long-term investment objectives, which is why we have regularly recommended being “balanced to risk,” revisiting concentrations in certain countries, sectors, and styles; incorporating “New Tools;” and being fully diversified.

For a more detailed account on what’s happening with respect to trade policy, what happened in the capital markets in the past few days, and what we think may happen next, please read on.

What Happened?

As previously noted, on April 2, 2025, President Trump announced sweeping new tariffs targeting nearly all US trading partners, and they were far more extensive than initially thought. These tariffs generally fall into two broad categories: 1) a 10% baseline or “universal” tariff on all imported goods set to go into effect on April 5, 2025, and 2) “individualized reciprocal” tariffs targeted at countries which the administration has determined have the largest trade deficits. These levies are expected to go into effect on April 9, 2025.

The reciprocal tariffs were calculated by taking each individual country’s trade deficit (in US dollars), divided by that country’s exports to the US (also in US dollars), and then multiplying that quotient by 0.5. For example: a country with a trade deficit of $100B and exports of $200B would be assigned a tariff of 25% (100/200 x 0.5).

We highlight this math as institutions and individuals from both sides of the political aisle have criticized this approach, leading some to conclude this policy was based on “revenge economics” as opposed to “rational economics,” a reference to the well-established notion that President Trump views our country’s trade deficit as a “national emergency.” It is understandable to some, therefore, that such an approach was taken; still, others believe there are shortcomings in the Administration’s methodology.²

Regardless, because these two tariff types are additive, economic and political forecasters estimate the average US tariff rate will now exceed 20%. This is a dramatic increase from roughly 3% last year, and it is easily the highest level in over 100 years, a historically significant shift.

Assuming such a spike in tariffs is sustained, it is estimated the price level on most goods could rise by 1.0-2.0%, and economic growth could contract by 1.0-2.0%. With inflation currently fluctuating near 2.5% and estimated growth for 2025 prior to recent trade news also hovering around 2.5%, these tariff-related impacts imply 0% growth in 2025 and inflation closer to 4%, or roughly twice that of the Federal Reserve’s stated 2% target. In other words, stagflation: low growth and high inflation, an inhospitable environment for most investments, and a proximate cause for markets’ negative reaction.

More specifically, US stocks finished lower yesterday by 5%, with many high-beta stocks and stocks of companies dependent on global supply chains falling significantly further. International stocks, which have outperformed for much of this year, fell less (~2-3%). Gold, another outperformer in 2025, was fractionally lower, whereas the price of oil slumped 7%; but bonds rallied as short- and medium-term interest rates fell.

What’s Next?

Aside from the debate over the Administration’s approach, two things stand out:

1. A new paradigm (one that views trade balances as an important determinant of national strength) is on the ascendancy, and another paradigm (one that focused on free trade) is on the decline;
2. The president retains great flexibility to modify, increase, or decrease tariffs based on his interpretation the impact tariffs are having with respect to “economic, trade, and national security matters.” He also possesses the ability to exempt certain goods from these new tariffs and certain countries such as Canada and Mexico, which were subjected to other tariffs earlier this year.

Given this flexibility, it is conceivable that negotiations could ensue and deals could be struck, inferring that this week’s tariff policies represent a “worst case scenario” and potentially setting the table for a rally in risk assets even if things are just marginally better than “the worst case.”

Yet, with this flexibility, more uncertainty was also seemingly introduced, which is an unwelcome outcome when business and consumer confidence were already at multi-year lows. Moreover, as noted earlier, we don’t believe an “about face” is imminent either.

Still, several wildcards remain, rendering the investment environment as extremely fluid and capable of causing a wide range of outcomes.

On one hand, as we have argued previously, the current situation is “man-made” and given this, thankfully, there are several “man-made solutions”:

1. Tariffs could be renegotiated lower, most likely with little advanced notice.
2. Higher tariff-related economic weakness could cause a larger negative stock market reaction which could spur voter displeasure and prompt a policy adjustment, and/or a response from the Federal Reserve in the form of lower interest rates to underpin economic growth in spite of higher inflation.

On the other hand, there is a real possibility that other countries will enact their own tariffs, further curtailing global trade – and with this possibility, nearly every US company will remain in “wait and see mode.” Some may delay hiring and capital spending decisions, while others may choose to proactively reduce headcount as a precautionary measure, causing unemployment to rise and risking an outright recession. This dynamic may lead to a self-fulfilling prophecy.

In this environment, we advise investors not to make any hasty or major adjustments to their portfolios. We acknowledge uncertainty is high and risks are rising. Weak economic data, thus far, has largely been confined to “soft” data, which is typically found within surveys or anecdotal reports. “Hard” data (actual reported data) has held up; however, many of the aforementioned tariff-related impacts may materialize later this year.

Counterbalancing weaker “hard” data, combined with potential negative earnings revisions, however, could come in the form of a focus shift from the administration toward “pro-growth” (and potentially market-friendly) policies such as tax reform and deregulation. As we cited in our 2025 Outlook, there are uncertainties with both, but a respite from trade policy could be viewed positively.

One final note: amid Thursday’s market sell-off, the decline of the US dollar should not be overlooked. The decline, relative to other assets, was a modest 1.6%. However, it is uncommon to see the dollar fail to catch a bid when investors are seeking safe havens. This could signal something significant and further underscores the need to remain diversified, disciplined, and diligent amidst a time of extreme uncertainty; for through every period of uncertainty, opportunity exists.

For more information, please contact your advisor.