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TARIFFIC STORY–Reactions to this Self-Inflicted Turmoil

Recent Tariff “News”!!—Liberation Day

On April 2, 2025, Donald Trump announced broad, sky-high and historic tariffs on all but a handful of countries. Much has been written about the tariffs and details have been discussed by many authors, analysts and all types of pundits. In simple English, base 10% tariffs have been imposed on imports from “all countries”, and then on certain countries (which is a large number) additional tariffs of 11%-50% have been imposed. And then there is an additional tariff on China, which is retaliating to initial tariffs. This is essentially a “trade-war”, initiated against allies and adversaries.

And then the Pause!……

As of April 9, 2025, the administration announced that “some nations” will have a pause on their tariffs for 90 days. All countries except China will have a baseline tariff of 10% for 90 days, while trade negotiations will happen. China has higher tariffs. The markets reacted very positively to the news of the temporary hold on tariffs, various indices were up between 8%-12% for the day. But, it’s important to bear in mind that this HOLD is on for 90 days and all these problems can become a reality again. Hence, next day, the markets displayed their displeasure! However, this back and forth, the initial tariff situation and “temporary pause” still creates/ maintains loss of US credibility in trade. There is uncertainty for the future of both markets and economy, “overall high tariffs” are still in place and there is a definite risk of a “slowdown” if not a full recession! Wall Street is not pleased to get into a “trade war with China”.

How will Countries React

These tariffs are so broad and expansive that getting clarity on the situation is going to be time-consuming, confusing and basically full of topsy turvy events and results.

1. Some countries will negotiate and cut all tariffs and agree to all terms
2. Some countries will negotiate and engage back and forth and settle on blended terms
3. Some countries will take a combative stance and will ratchet up the situation

The overall success or failure of these tariffs will depend on the size and importance, globally, of the countries that take the various approaches. At this time, China has taken the third approach. EU and Canada are somewhere between second and third. The other angle is: countries like South Korea, Japan, EU, Canada, India take a blended approach while also creating trading alliances between themselves and China, individually or as a group. There are so many permutations and combinations. The certainty is uncertainty, loss of US credibility, confusion, economic and asset related turmoil, disruptions, growth slowdown and possibility of long-drawn negotiations.

Broad based and High Tariffs are Bad

The Smoot-Hawley Tariffs of the 1930s are credited with being one of the drivers of the Great Depression. Per many economists, academics and Wall Street analysts, the current tariffs are higher and broader than the Smoot Hawley tariffs after adjusting for various factors.

Post-Tariff Current Market Volatility and Implosion; and Resulting Potential Economic Turmoil

The US equity markets are currently spiralling downward and the S&P 500 has lost over 12% from April 1 to April 8, 2025, thus the market is currently in a “correction”. The volatility is stomach churning and from recent all-time highs of the S&P 500 (February 2025), the descent is around 21%, which is a “bear market”. The S&P 500 index is broad-based and represents “US Equity markets”. The volatility and losses in the Dow Jones (30 Blue-Chips), the technology heavy NASDAQ and the small cap/ mid cap focussed Russell 2000 tell the same story. The actual and percentage losses in different indices vary but there is red-ink everywhere and losses are steep! The US equity markets are forward looking and, at this time, are predicting pain and losses. Companies like Delta Airlines and Walmart, as a representation, have pulled or revised their forward guidance downwards and are predicting revenue and earnings downsides. So, there is a strong possibility of an “earnings shock” to the market(s). In this situation, there is going to be a “multiple contraction”. If there is a negative impact on both “earnings” as well as “multiples” then logically, valuations, i.e. markets, have to come down! Markets hate uncertainty and currently the message from the administration is varied, inconsistent and lacking focus. So, trying to understand and model the “impact” on equity valuations is tough. Typically, bear markets don’t end by hitting the -20% number, when various bear markets (S&P 500) are analyzed, over the past 30+ years, the fall is typically 25%-40% from peak levels. The global financial crisis related bear market was the worst in recent history and had a peak to trough fall of around 55%. Let’s hope we don’t get there! So, the peak reached by the S&P 500 in February 2025 was close to 6,140, and from there we could extrapolate that a bottom could be reached around 3,900 to 4,600. As of the 2nd week of April we could be +/- 10%-12% from there. Bear markets end when the “bottom” is reached, BUT markets always test the bottom 2- 3 times before there is stability and trading around the bottom. It is difficult to know when the bottom is reached and it is typically identified a few weeks or months after. The caveat here is that the shock from tariff announcements, “roll-out” and economic impact will be like “any other bear market”, though it is a totally self-inflicted bear market. If the economic impact of these tariffs is worse than what is currently being anticipated and there is an escalation into a full-blown trade war, with China or others, then we could have a bigger crisis. Then the bottom could be lower than the range mentioned above and it could be reached later, with significant volatility, and the markets could remain at the low levels for longer.

Logically, gold would be/ IS the safe haven asset class. And currently, it is behaving as such. Gold prices are at all time highs. But, therein lies some risk of volatility in gold. Over the last few days, there have been reports of investors having to sell gold to make up margin losses in other asset classes. This has resulted in gold prices not rising as one would hope in times of turmoil and actually going down on some days. The other fact to keep in mind is that gold is at life-time high prices (and hitting record highs frequently) and thus creating a psychological purchase barrier for investors. But, gold is still up 16% (YTD 2025) and has held its own during this turmoil. It’s still a safe haven store of value. Other commodities like oil prices are falling owing to various reasons like an expectation of potential fall in demand going forward, due to this turmoil.

From the beginning of 2025 to now, 30-year fixed rate mortgage rates are coming down, and currently are at 6.65%. But since the tariff announcement, the US Treasury market has been experiencing tremendous volatility and dislocation. At its highs, the 10-year Treasuries traded at a yield of 4.47%, a huge 60 basis points up from 2 days ago. The biggest three-day jump since December 2001. The 30-year Treasury yield jumped as much as 25 basis points, the steepest climb since the 2020 pandemic shock. Investors feel that the tariffs will be inflationary for US and global consumers and thus potentially disturbing the rate-cut trajectory of the Federal Reserve. Conversely, companies could face revenue loss and lower earnings and thus would react by laying off workers. This affects consumer sentiment, has a negative impact on employment, and has a further downward pressure on companies. This vicious cycle downwards could have the US and global economies spiralling into a Recession! But, the possibility of a recession could result in rate cuts from the Fed. However, rate cuts during a “recessionary environment” do not have the same strong positive impact like they do in a good economy. There is also a serious risk of stagflation and that can be ruinous for the economy. US fixed income markets are throwing out mixed signals, and spreads between high-yield bonds and treasuries are widening (up almost 40% since beginning of the year). Turmoil in treasuries ensures attention from the Fed, officials and investors because of far-reaching ramifications. If Treasuries are not viewed as the “safe-haven” globally, then that can cause chaos in the USA and globally.

The US residential real estate may not remain unscathed during this turmoil. Down-side risk is enhanced because prices are high, many markets were already slowing and affordability is low. US commercial real estate (especially office buildings) was already experiencing some downturn. The US Economy could experience adverse conditions and GDP contraction. Many Wall Street firms have revised upwards their US Recession probability for 2025. The world equity markets whether in the EU or in Asia have all reacted adversely to these tariffs and foreign exchange rates will adjust. Different countries will have varied levels of economic hardship based on rates applied and export sectors affected. Indian equity markets have been less negatively impacted since April 2025, but that’s mainly because Indian equities had been selling off from their sky-high valuations. The Indian markets (Nifty 50) reached their lifetime highs in September 2024, and were down about 10% till March 2025. Currently, the Nifty 50 is down about 15% from those highs. A saving grace for India, is that till April 8, 2025, pharmaceuticals are not impacted by tariffs, but that will change soon.

Positives of These Tariffs and Flaws in These Tariffs

There is some merit in complaints raised by the Trump administration regarding “unfair trade” and “trade barriers” set up by some countries. And that could be and should be rectified, but that could be done with a scalpel and not with a chainsaw. Undoubtedly, trade with China could be adjusted to rectify some barriers set up by the Chinese government to disadvantage US companies. But, the current universal tariff approach will be more destructive than beneficial. Importantly, it erodes US credibility among global trading partners. Just as uncertainty is hated by markets, lack of credibility is a huge barrier to trade! Further, if the goal is to bring back manufacturing to USA, then that needs to be accomplished in a more discerning manner. Some, low value-add manufacturing has a large cost differential between manufacturing in the USA versus in the current emerging market supply chain destination, and these tariffs will not address it. Wall Street analysts have projected the cost of manufacturing iPhones in the USA at 3.0x current levels. Further, for companies to break up their current supply chains and set up “new” supply chains locally is time consuming, difficult and cumbersome. Risk is further compounded because this administration is now viewed as “unpredictable” and could easily reverse policy due to “some deal”. Effects on the world economy are going to be profound, wide spread and negative. These tariffs are trying to remake the global trade system and rollback globalization which has flourished for the last 40 years. This is going to be a herculean task, since it is done through executive order and these initiatives are globally popular. A different administration in 2029 could reverse this with the stroke of a pen! Countries might find ways to continue with current trade systems, since they have lifted populations out of poverty, by creating loopholes. These tariffs have been discussed as “reciprocal” and calculated based on a formula which takes into account US trade deficits with various countries. Firstly, most mainstream economists unequivocally agree (whether in academia or on Wall Street) that these are not “reciprocal”. Secondly, the formula used is opaque, poorly thought out and maybe wrong. Punishing countries for running a trade surplus against the USA is wrong, incomprehensible and impossible to reverse! Vietnamese exports had tariffs imposed, in response their government removed all tariffs on US imports. But then they were told that removing import tariffs was not enough to elicit a change. The administration wants Vietnam to structurally change their systems, that’s difficult to achieve.

So, HOW SHOULD INVESTORS REACT!!!???

Equity investors, in USA or in global markets should be prepared for volatility. There will be wild swings in both directions. Bottoms will be tested multiple times and then there will be relief rallies. At times, one will feel it’s a falling knife, at other times one will feel it’s a buying opportunity and one should “buy the dip”. All those are valid thoughts. Doing nothing when markets gyrate violently down or up is also valid. Next 12-18 months will have lots of this. There is a chance, the administration may completely reverse its policy and clean the slate. There is a chance, tariffs on some countries may be taken off. If that happens then markets could rip!

For the next year or so, it’s going to be a roller coaster ride so “hold on tight”! If one is not ready or able to handle this volatility then selling and taking gains is one way to handle this situation. This is definitely sub-optimal if one is a long-term investor, one doesn’t need cash in the short-term, one holds high quality stocks, one holds index ETFs and one is well diversified. LONG TERM, the “general market” will go up but the caveat is that different stocks will react differently and will rise or fall with different trajectories. If one is holding “high-risk” or “speculative” stocks then those have a high chance of negative outcomes. Over the mediumterm, once this storm passes, the markets will go up. Timing depends on how things get resolved, at what speed and how much lasting damage happens. For a long-term investor,
holding onto one’s current fundamentally high-quality positions (index ETFs or stocks) is a prudent option. If one has quality assets, is well diversified, has a medium to longer term horizon and comfortable with one’s position then DOING NOTHING may work during this time. If one is holding high-Beta stocks or high-Beta assets (crypto) and if one can trim the risk at a profit or breakeven then that’s a distinct tactic to employ. If one is holding very risky, speculative stocks/ assets (small cap volatile stocks or crypto) or stocks that have high financial risk (high debt burden) then those are loss-prone during economic uncertainty and turmoil. Trimming or closing those type of positions in a risk-off environment makes sense. In terms of index ETFs and high-quality large cap names, lower prices may provide interesting and attractive buying opportunities. Current prices could be attractive buy points. Buying good assets at “wrong prices” could end up being problematic, e.g. if one bought QQQ (Nasdaq ETF) in 2000 (around peak) one wouldn’t be breaking even until 2015. Similarly, if one bought residential real estate to mimic the S&P Case Schiller 10-city Index (index of 10-prime US cities) in 2006 (around peak) one wouldn’t be breaking even until 2020. So, at least, buying high quality assets at this time (at prices off the peaks) “mitigates some of the price risk”. It’s impossible to “time the market”, so, buying the dip is a strategy to employ. But there is always a risk of further downside. Hence, buying in smaller chunks and deploying capital judiciously at various levels over time is the way to go. This turmoil could last for some time so capital that is deployed should be for a longer-term investment horizon. Diversification across asset classes and across geographies would be beneficial in this environment. These tariffs will have different effects on different regions and hence owning assets (mainly equities) in various markets will be beneficial. Sometimes, once high-flying stocks or “high quality stocks” get hammered more than their peers (almost “fallen angels”). Before jumping into those names because their percentage losses are more attractive than those of their comps, one should understand why that has happened. It could be a result of the new situation being more detrimental to that stock versus comparable stocks. Small-caps and mid-caps may be somewhat less exposed to international supply chains than large-caps and mega-caps and hence may have lesser tariff risks. But, these may have higher risks in an overall risky economic environment. Russell 2000 has been hit harder than other indices but may conversely also provide a better entry point and have higher upside potential. If one wants to add leverage to equity positions (not currently recommended) then buying a levered ETF may be a move worth considering versus buying using margin loans. Prudent investing is the name of the game in uncertain times and leverage, risky stocks/ indices should be studied carefully. Consider buying index ETFs like SPY, DIA, QQQ, IEV or IWM as appropriate. Buying gold is definitely the most obvious move. It can be both defensive and offensive in the current environment. Residential real estate purchase, for investment, may not be judicious, especially using high leverage.

CONCLUSION:

Bottomline, making hasty decisions or panic-selling, like in any tense situation, is NOT to be done and is NOT recommended. It is imperative to make well thought out decisions to match one’s personal goals. Overall, if one’s situation permits, hold onto high-quality names, trim some risk, buy on dips, dollar cost-average, diversify, buy gold and don’t deploy capital that is needed in the immediate or short term. Smart investing in this environment can be very lucrative but there is no guarantee.