Why is the market selling off today when everyone knew that tariffs would be
announced?
The Tariff announcement far surpassed expectations
The administration’s tariff announcement today surpassed expectations and resulted in broad
stock market declines. The dollar also declined, and the benchmark 10-year Treasury Bond
Yield fell by 8 basis points to 4.05%. Trump has referred to the tariffs as reciprocal, but the
reciprocity is not based on other countries’ tariffs alone, rather they are tied to the current trade
balance. Countries with no trade surplus with the US receive a baseline 10% tariff which will
go into effect on April 5th. 60 countries with trade surpluses with the US will see higher tariffs.
Notably, there will be no new tariffs on Canada and Mexico. The effective tariff rate on Chinese
goods will rise to 79% and could go up to 104% if taxes on countries importing oil from
Venezuela are implemented. This aggressive stance is aimed at bringing companies back to
the US and raising revenue by having more corporate income in the US. Commodity and
sectoral tariffs have been exempted for now. This includes exemptions for pharmaceuticals and
semiconductors, although Trump is still promising tariffs on these sectors and on countries
importing oil from Venezuela.
Fiscal impact estimated at 2% of GDP
The total tariff revenue from these actions is estimated at $620 billion, which is 2% of GDP.
This makes the effective tariff rate 20%, up from 2%, which would represent the highest rate
since before World War Two. The estimated tariff revenue is $100 billion higher than corporate
tax receipts, providing room for lowering corporate and personal income taxes. Tax cuts are
likely to be extended, although this does not provide any incremental benefits. The tax bill is
expected to include 100% expensing/depreciation for capital expenditures, including structures,
retroactive to January 1st.
Economic impact uncertain
The overall impact remains uncertain. Economists cannot accurately forecast the impact of
simple policy decisions under the best of circumstances, let alone ones of this magnitude.
Tariffs generally result in some combination of price increases, decreased demand and
currency appreciation. The modest decline in Treasury yields and inflation breakeven rates
indicate the market is primarily worried about their potential recessionary impact. Growth will
be impacted by damaged business and consumer confidence, along with restricted exports due
to retaliatory tariffs. Consumer’s aversion to inflation will limit the ability to pass through the
taxes, leaving corporate profits at risk.
Maintain a diversified, strategic portfolio allocation
The tariff announcements represent the largest potential shakeup to the global financial system
since the aftermath of the 2008 Global Financial Crisis. Generally healthy corporate and
household balance sheets limit the downside impact of a recession. Client liquidity needs were
reviewed at the start of the year with recommendations made where needed to rebalance and
increase reserves. We will continue to watch and analyze new developments. While the
generous returns of the past decade made it easy to become complacent, we continued to maintain the diversification to weather periods of volatility like this. Attempts to time the equity
markets will more likely lead to destruction, rather than preservation of value, particularly if
taxable gains result.