Yesterday’s tariff announcement – while broadly anticipated – exceeded the scope and magnitude of market expectations. As markets react to this news, we wanted to share a quick update and reminder that we are here and monitoring this fluid situation on your behalf. Tariffs are a tax on global trade, and investors are concerned that these protectionist policies may slow the global economy and alter geopolitical relations.
What was announced?
- The US announced its trading partners would be subject to the greater of 10% universal tariff or 50% of reciprocal tariffs
- Canada and Mexico were not included in this round, but remain subject to previously announced tariffs
- The trading partners most impacted were China and Vietnam, with China now subject to a 54% tariff rate
- This shifts tariff duty as a share of GDP to the highest levels in more than a century
What are expected impacts?
Please note the situation is fluid and there is no recent precedent, so it is not possible to make reliable predictions. A consensus of business economists projects a range around the following.
- Inflation is expected to increase by 1.5-2%
- Economic growth is expected to decline by a similar amount
- The combination of slowing growth and rising inflation creates the possibility of a “stagflationary” environment
- As implemented, these tariffs would be expected to raise ~$400 billion in revenue –though this figure does not account for changes in economic activity/trade.
How are markets responding?
- While this is fluid and unfolding, initial market reactions have been the most pronounced in US equities, with declines of ~4% in the first day of trading
- The USD has weakened vs. most foreign currencies, contributing to stronger market performance outside the US
- US Interest rates have fallen as the market now expects more rate cuts to spur growth to be necessary later this year
What are investors watching next?
- Investors and companies are watching for expected retaliatory tariffs and further response by the US
- Escalation could include currently exempt sectors – such as pharmaceuticals and minerals – will these be included in future announcements?
- Will there be successful concessions/re-negotiations in response?
- How will companies and investors respond to ongoing policy uncertainty?
In recent months we reduced equity exposure in most of our client accounts and within equities, diversified away from the S&P 500 with its high concentration in the technology sector. In addition, our international allocation is a source of positive contribution in 2025. Global equity indices were down just over -1% in Q1 2025, vs. -4.3% for the S&P 500. Bonds are also providing downside protection with positive returns in the first quarter and meaningful positive performance today. While today’s market reaction is meaningful, overall market declines over the past month bring markets back to a level recently seen prior to the election in September 2024.
If your near-term circumstances or liquidity needs have changed, please contact your Choate Wealth team to review and discuss.