Capital Markets | Tariff Update

Weekly Market Update

April 11, 2025

What happened in markets this week?

Equity markets continued to be extremely volatile over the past week. Massive market swings during the week were driven by a deluge of news reports that continue to provide no clear guidance or definitive timeline on the current tariff situation. Broad-based equity indices in the U.S. slumped early in the week, spiked on Wednesday following news of a “pause” on most reciprocal tariffs, and sold off again on Thursday before finishing the week higher. For the week, U.S. Large Cap stocks were up 5.7% and U.S. Small Cap stocks were up 1.8%. International equities were also up slightly for the week.

The level of volatility in U.S. bonds markets was even more eye-opening for investors this week. U.S. Treasury yields, particularly longer-dated bonds, spiked meaningfully as bonds sold off. This “rate spike” was unexpected as bond yields typically fall as investors become more concerned about economic growth. The 10-year Treasury yield, for example, rose to 4.5% by week’s end, an increase of more than 50bps in just more than a week's time.

Why did the “pause” on reciprocal tariffs not create a longer lasting rally?

The 90-day pause on reciprocal tariffs that was announced on Wednesday did provide at least some relief for investors. Following the announcement on Wednesday, equity markets rallied significantly. The S&P 500, for example, finished the day up 9.5%.

Still, the pause did not suspend all of the tariffs that have been announced this month. Baseline tariffs of 10% on all U.S. imports are still in effect, as are the reciprocal tariffs that were placed on China.

Additionally, while the pause on reciprocal tariffs provides some time for negotiated trade deals, there is no guarantee that reciprocal tariffs will be negotiated away. The trade dialogue between the U.S. and China has only become more adversarial in recent days. The U.S. and China have engaged in tit-for-tat tariff responses as both countries, as of this writing, seem unwilling to back down from their aggressive tariff stances.

Will the U.S. and China be able to work out a trade deal eventually?

As mentioned, the discourse between the U.S. and China seems to be growing more contentious by the day. In fact, just today, China announced a tariff of 125% on certain U.S. exports into China. This last round of tariff announcements have essentially made a long-term trade relationship between the two countries all but impossible.

While it is true that both countries would like to be less reliant on each other for strategic reasons, this “decoupling” is more likely a long-term strategy. An abrupt decoupling between the two countries would lead to economic consequences for which neither country wishes. The fact of the matter is that the U.S. consumer has few alternatives for many of the goods that China exports to the U.S., and China’s economy is heavily dependent on the U.S. consumer. Shutting off trade between the two countries at a moment's notice will create economic consequences that neither country wishes to endure.

As such, it is just a matter of time before the countries begin to negotiate in an effort to ease the escalation we have seen this week. It is far too soon to know when these negotiations will begin in earnest, how long it will take for the two countries to find common ground or just how broad based any trade deal will be. At the moment, the trade dispute between China is highly correlated with the anxiety seen in markets. Markets would certainly cheer any positive development as it relates to U.S. and China trade, but it is likely that future negotiations will be full of unexpected setbacks that will keep markets guessing for a while.

What are the prospects of trade deals between the U.S. and other countries?

There has been a lot of talk about potential trade deals with U.S. trade partners in the past week. For its part, the European Union also announced a 90-day pause on the retaliatory tariffs it placed on the U.S. in order to give time for negotiations. Dozens of other U.S. trade partners have openly declared that they wish to negotiate with the U.S. as well. It is likely that the 90-day pause on reciprocal tariffs will lead to trade concessions that ease the minds of global investors. For now, however, it is impossible to know just how meaningful and extensive these trade deals might be.

Is it possible that inflation increases to the levels seen during the pandemic?

While the implementation of tariffs will likely lead to higher inflation, we do not expect inflation to reach levels we saw during the pandemic. Inflation during the pandemic was primarily driven by a combination of a) extreme supply shortages caused by closed economies and b) fiscal stimulus that dramatically increased consumer spending. These two factors created extreme levels of excess demand that pushed inflation to 9% in 2022.

In the current environment, the potential for excess demand is relatively low given the fact that consumer spending is unlikely to be as strong as it was a couple of years ago. Some economists are expecting inflation to increase about 2% from its current level, while others expect a slightly larger increase in inflation as a result of the tariffs. Regardless of how different inflation forecasts are at the moment, few expect a long-lasting inflationary impact from tariffs. The general idea is that price increases resulting from tariffs will eventually lead to slower demand and softening inflation.

Has the equity market bottomed out yet?

It is likely we will see strong performance days in the future, similar to what we saw during Wednesday’s trade session, especially if new deals are made. However, it is also likely that downside risk will not improve until there is more certainty around trade policy going forward.

The VIX, which measures stock market implied volatility, is currently trading around 50. This level is nearly three times higher than the historical long-term average. Bond market volatility, which is often measured by the MOVE index, is also significantly higher than normal. These indices indicate that markets continue to expect elevated volatility in both bond and equity markets in the short term. As such, the possibility of even lower asset prices in the short term is much higher than it would be normally.

At the same time, it is important to know that market volatility rarely remains at these lofty levels for an extended period of time. For example, during COVID-19 — one of the most uncertain periods in recent history — the extreme volatility we see today only lasted a few weeks before it began to ease. Given that markets have exhibited this same behavior in almost every case where market volatility is extremely high, history is more likely to repeat itself than not.

The good news for investors is that when market volatility does calm down, it almost always coincides with a strong rebound in the market. Going back to 1990, the VIX has closed above 50 a total of 75 times (one of those occurrences occurred this week). In each of the past 74 occurrences, the S&P 500 forward return was positive one year later. In 68 of those 74 occurrences, the subsequent five-year total return for the S&P 500 exceeded 100%.

Of course, history doesn’t always repeat itself, so there is a chance that history will end up not being a good guide in the current situation. That said, it is safe to say that the possibility of an extended run of extreme market volatility is rather remote.

Why have bond yields spiked in recent days?

Longer-dated U.S. Treasury yields have spiked this week in a way that sent shock waves across Wall Street. The 10-year U.S. Treasury yield, for example, has increased by more than 50bps in just more than a week’s time.

In a “normal” environment, bond yields are typically driven by economic growth expectations and inflation expectations. Put simply, if GDP is expected to grow at 2% annually over the long term and inflation is expected to grow at 2% annually over the long term, the 10-year Treasury yield should be somewhere in the range of 4% (give or take about 50bps for other factors like “term premium”). Given that few know how tariffs may impact economic growth and inflation over the long term, the recent volatility seen in bond markets does appear to be driven by factors outside of economic fundamentals.

It is impossible to know just how much of the recent increase in yields has been driven by behavioral aspects, but it is important to note that bond yields and stock prices are typically correlated during periods of market uncertainty (i.e. when stock prices decline materially, bond yields decline as a result of investors seeking the “safety” of Treasuries). This has not been the case over the last week as bond yields have climbed and equities have simultaneously sold off. As a result of this dynamic, some market participants have speculated that longer U.S. Treasury bonds are being sold as investors move to cash. Other market participants have speculated that the sell off in Treasury bonds is the result of eroding confidence in the U.S. economy and government fiscal policy. This is all speculation at this point. What is not speculative, however, is that the Federal Reserve can and will apply its monetary policy tools (ex: the Fed buys longer-dated bonds) should it become uncomfortable with a further increase in longer-dated Treasury yields. And, while there have not been any public comments on this from the Fed at this point, a further increase in longer-dated bond yields may result in some sort of intervention from the Fed that helps alleviate the volatility.

Is the U.S. economy heading into a recession?

No one knows for sure if the economy is headed for a recession or not, but the longer these tariffs (even the smaller 10% reciprocal tariffs) stay in place and the more trade tensions with China continue to fester, the more probable a recession becomes. Some economists have put the probability of a recession at 30%, while others are suggesting that a recession is almost certain to occur in 2025. The probabilities should be taken with a grain of salt, however, because nobody can predict just how the tariff situation will unfold in the months ahead.

While the term “recession” often arouses fear and worry, it is important to remember that recessions are a natural part of the business cycle. Recessions are typically short lived in the U.S. (most last somewhere between 6-12 months). Additionally, the U.S. economy always comes out of recessions stronger and more resilient to future economic shocks. The point is that while recessions do have a very negative connotation, the reality is that recessions can serve an important, and even sometimes necessary, role in the business cycle by helping to curb inflation, cleansing inefficiencies and setting the stage for more stable future growth.

What should investors do?

During trying times like these, it’s more important than ever for investors to keep a long-term perspective. While it may feel like you want to get out of the market, we advise against selling after the market has already fallen 15%. If anything, throughout history, these bouts of volatility and steep declines have proven to be great long-term buying opportunities and we recommend that investors consider adding to stocks if they are now underweight equities in their portfolios.

Weekly Market Update

April 4, 2025

Volatility in global capital markets has spiked over the past days following President Trump’s tariff announcements on Wednesday afternoon. U.S. equity markets sold off significantly on both Thursday and Friday. The S&P 500, for example, declined a total of 10% in that two-day period.

Treasury yields, particularly longer dated treasury yields, have dropped meaningfully as investors sought the safety and security of U.S. Treasury Bonds. The 10-Year Treasury yield fell more than 20bps over the past two days and is currently yielding 4%.

Why have capital markets been so volatile the past two days?

The tariff announcements, simply put, have created significant uncertainty for market participants, businesses and consumers. Given the complexity of global trade partnerships, global supply chains and the tariffs themselves, it is impossible for anyone to know just how negative of an impact the new tariffs will have on the U.S. economy. While it is safe to assume that the announced tariffs are not good for economic growth, the magnitude of any economic slowdown depends on a variety of factors that are impossible to predict today. As a result of this elevated uncertainty, investor sentiment has soured quickly, and high volumes of risk assets have been sold.

Overview of the tariff announcement

First, the tariffs that were announced earlier this week were more expansive than market participants had expected. Markets did expect new, broad-based tariffs to be announced this week, but these consensus expectations materially underestimated what was officially announced on Wednesday afternoon.

A high-level summary of the new tariffs:

1. Starting April 5, a 10% baseline tariff will be applied to all imported goods.
2. Retaliatory tariffs were also issued to select countries in addition to the baseline tariffs mentioned above. These retaliatory tariffs apply to China, Taiwan, Japan, Cambodia, South Africa, Brazil and the UK.
3. Product-specific tariffs for aluminum, steel and auto imports will not have reciprocal tariffs applied on top of the 25% tariffs. That exemption also applies to pharmaceuticals, semiconductors and lumber, which could be subject to 25% tariffs in the future.

In terms of countries, the largest tariffs have been applied to China, Vietnam, Taiwan and Indonesia. It appears that the large tariffs applied to small Asian economies such as Vietnam are intended to prevent China from using those countries to circumvent tariffs levied on China. India will have a 26% tariff applied to its goods, the EU will have a 20% tariff applied to its goods, and Japan will have a 24% tariff applied to its goods. Canada and Mexico received far lower tariffs.

What should investors, businesses and consumers expect assuming that the announced tariffs stay in place?

The announced tariffs will place a high burden on U.S. consumers and businesses. Good prices are likely to rise in the short term, but this increase would eventually lead to lower demand, lower spending and lower prices in time. Since consumer spending represents about 70% of annual economic activity in the U.S., any material slowdown in spending would bring lower corporate earnings, lower equity prices, higher unemployment and economic recession in the U.S. The bottom line is that the longer that the announced tariffs stay in place, the more painful the economic outcomes will be.

How long might the announced tariffs stay in place?

Given the complexity of the situation, it is impossible to know just how long the tariffs will remain in place. That said, the tariffs that have been announced seem to provide some room for negotiation. For example, some of the new tariffs have staggered implementation dates. This framework supports the idea that new tariffs are being used as a bargaining tool and are not expected to be long term in nature. In fact, some countries have already indicated they will reduce the tariffs they apply to U.S. imports as a result of the announcement.

Some of the new tariffs are so high that they essentially will stop all trade with the U.S. The tariffs on China, for example, are so high (at 54% and, for some products, as high as 67%), as to be almost restrictive for US-China trade. This suggests it is unlikely they will be long term in nature, although we could see an escalation of tariff wars in the short term.

Domestic politics are also a consideration. With U.S. midterm elections coming in 2026, there are some concerns within the Republican party that changes within U.S. trade policy, and the uncertainty it has created may result in a loss in Congressional majority. Without a majority in Congress, it is likely that the Trump administration will not have the support it needs to fulfill its agenda. (Note: Recent polls suggest that most Americans, at least initially, are unhappy with the tariffs that were announced this week).

Finally, a long-lasting trade war would certainly throw the entire global economy into an economic recession. While some trade partners currently have adversarial relationships, none of those parties wish to intentionally force their domestic economies into decline when compromises may be possible.

How will tariffs impact monetary policy in the U.S.?

The new tariffs also create more uncertainty for monetary policy in the U.S.

In the short term, as noted previously, new tariffs are expected to create more inflation across the aggregate U.S. economy. In this scenario, assuming unemployment does not increase materially, the Federal Reserve is unlikely to reduce its short-term policy rate any time soon.

Said, should the new tariffs remain in place for a longer period of time (several months or more), any short-term increase in inflation will likely slow aggregate demand. Slower aggregate demand will lead to higher unemployment and lower inflation. In this scenario, the Fed would reduce its short-term policy rate, maybe by more than the 50bps currently expected in 2025.

Behavioral finance considerations

There are still a lot of unknowns at this time. The short-term outlook is certainly creating a lot of anxiety for businesses and consumers alike. It is human nature to be fearful when the future looks so uncertain. It is important to note that the selloff seen in recent days is not based on economic fundamentals or any hard data. Market prices are not currently reflecting expectations for consumer spending, expectations for corporate earnings and expectations for economic growth. Nobody can predict these variables with any confidence based on the current facts and circumstances. Simply put, the market’s reaction over the past couple of days has been primarily driven by psychological forces (i.e. “the fear of the unknown”). These are the same forces that would likely move markets higher at the sign of any good news in the days and weeks ahead.

What should long term investors do?

As always, long-term investors should stick to an investment strategy that matches their willingness and ability to take risk. If an investor has a long investment time horizon and is willing to take risk, for example, the selloff in stock markets provides an opportunity to buy long term investments at a 10% discount to Wednesday's closing prices.

Short-term investors (a year or less), on the other hand, should rarely have any material exposure to equity markets. As the past few days may have illustrated, short-term investors who wish to have allocations to stocks do so at their own peril.

It is also important for investors to remember the following.

1. Higher levels of uncertainty lead to higher levels of volatility and deeper stock market declines.
2. High levels of uncertainty are typically short lived. In early 2020, for example, COVID-19 created a level of uncertainty that the world rarely sees. For investors, this uncertainty lasted about 3 months. Stocks declined about 35% in early 2020 before finishing the year up close to 20%.
3. It is impossible to time when markets will sell off and when markets will reverse course. Investors that stick to an investment strategy — and avoid changing that strategy based on short-term considerations — are those who grow their wealth the most over the long term.

What to expect in the short term

Facts and circumstances continue to change at a blistering pace. Further volatility in both bond and equity markets is likely to persist over the short term until there is more clarity. It is a near certainty that the recently announced tariffs will be changing in the weeks ahead. To what degree might tariffs change? Nobody knows, but it is fair to assume that few of the parties involved actually want to see the current situation escalate any further.

We will be keeping you posted as the facts and circumstances change.