Tariff Announcement and Market Impact
The long-awaited decision on the broad application of tariffs was unveiled by President Trump from the Rose Garden yesterday, billed as “Liberation Day.” It includes a baseline tariff of 10% to be applied virtually across-the-board with additional reciprocal tariff rates specified for each individual country. The new tariffs will bring the aggregate tariff rate to levels not seen since the early 1900s when the U.S. enacted the Smoot-Hawley Act. We expect that there will be some rate changes as some countries try to negotiate with the U.S. Initial reports indicate that countries with smaller economies like Thailand are seeking negotiations with the U.S. immediately, while countries and trade zones with larger economies like China and the European Union are readying retaliatory tariffs.
The effects of the tariff decision will be broad and far reaching. As the markets digest the news released after the market’s close yesterday, the initial reaction reflects the uncertainty accompanying the decision’s breadth and complexity. This morning, Dow futures were down about 3%, S&P 500 index futures were down 3.5%, and Nasdaq futures were down more than 4%. Most commodities, including gold, were down while crude oil was down more than 4%. The dollar, which usually rallies in periods of heightened uncertainty, is also down relative to other major currencies. Global investors flocked to the safety of the 10-year Treasury bond, causing its yield to fall by 0.15% overnight, a significant short-term change for such a deep and liquid market.
The precise economic impacts of these tariffs are yet to be seen. Most economists agree that rising pricings due to the tariffs will hurt an already skittish consumer and pressure aggregate demand in the U.S. This could spur the Federal Reserve to decrease interest rates sooner than anticipated to encourage consumers and companies to spend at more normal levels, especially because consumption accounts for approximately two-thirds of our gross domestic product (GDP). The Fed’s aim would be to avoid a stagflationary environment where inflation increases while GDP growth slows.
There will no doubt be pressure on undiversified portfolios today. As companies try to alleviate some of the price impact on consumers, their margins could be squeezed while higher prices will reduce sales volume. This could pressure earnings expectations which, in turn, could drive stock prices and low-quality bond prices lower. However, we always focus on stocks and bonds of high financial quality for our clients as we seek to maintain resilience in their portfolios. In the aggregate, these assets often hold up better during times of market stress and lead in the recoveries which follow. Market selloffs, while unpleasant, are commonplace and built into our long-term assumptions of market movements and risk. This event is no different. We never know what event will occur to stress the markets, but there is always one ahead of us. Members of your investment management team have managed assets through market-moving events such as the Dot Com Bubble, 9/11, the Great Financial Crisis, U.S. debt downgrade, and Covid to name a few. These events now appear as small blips on a long-term chart for the market. The U.S. equity market is coming off two consecutive years of returns in the mid-20% range, and it is not at all unusual to see a partial retracement after a sustained period of returns above the long-term average.
As a reminder, the Portfolio Managers at Broadway Bank continue to constantly monitor client portfolios and the economic environment and adjust portfolios as appropriate. Our investment process and philosophy have served our clients well throughout Broadway Bank Wealth Management’s multi-decade history, and we continue to see it working in real-time today.
